Document
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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
Commission File Number 000-17082
 
Novelion Therapeutics Inc.
(Exact name of registrant as specified in its charter)
 
 
British Columbia, Canada
98-0455702
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
c/o Norton Rose Fulbright
1800 - 510 West Georgia Street, Vancouver, BC V6B 0M3 Canada
(Address of principal executive offices, including zip code)
(877) 764-3131
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  o 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer
◻  
Smaller Reporting Company
Emerging Growth Company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No   x 
The number of shares outstanding of the registrant’s Common Stock as of November 5, 2018 was 18,932,230.



Table of Contents

Novelion Therapeutics Inc.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 

Introductory Note and Cautionary Statement

All references in this Form 10-Q to “we,” “us,” “our,” the “Company” and “Novelion” refer to Novelion and its consolidated subsidiaries, including Aegerion Pharmaceuticals, Inc. (“Aegerion”) and its subsidiaries, which we acquired on November 29, 2016, unless the context suggests otherwise. Aegerion is our operating subsidiary and substantially all of the Company’s assets and the majority of its operations reside at Aegerion. As described elsewhere in this Form 10-Q, Aegerion has a substantial amount of debt, including its new secured term loan facility entered into in November 2018, its 2% convertible notes due August 2019, and also as the borrower under a secured intercompany loan arrangement with Novelion. In light of these arrangements and their provisions, you are cautioned that Aegerion’s interests may not always be aligned with those of Novelion or its shareholders.
Trademarks
Novelion®, Aegerion®, JUXTAPID®, LOJUXTA®, MYALEPT® and MYALEPTA® are registered trademarks of Novelion or Aegerion. All other trademarks referenced in this Form 10-Q are the property of their respective owners.



2

Table of Contents

PART I — FINANCIAL INFORMATION

Novelion Therapeutics Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands)

 
September 30, 2018
 
December 31, 2017
Assets
    
 
    
Current assets:
 
 
 
Cash and cash equivalents
$
27,378

 
$
55,430

Accounts receivable, net
21,560

 
22,191

Inventories - current
19,120

 
15,886

Prepaid expenses and other current assets
15,204

 
11,436

Total current assets
83,262

 
104,943

Inventories - non-current
31,958

 
33,940

Property and equipment, net
1,967

 
2,920

Intangible assets, net
206,450

 
225,272

Other non-current assets
1,349

 
2,247

Total assets
$
324,986

 
$
369,322

 
 
 
 
Liabilities and shareholders’ (deficit) equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,452

 
$
13,800

Accrued liabilities
43,844

 
41,838

Short-term debt to Shareholders
16,367

 

Convertible notes, net
287,030

 

Provision for legal settlements - current
10,167

 
8,596

Total current liabilities
370,860

 
64,234

Convertible notes, net

 
258,538

Provision for legal settlements - non-current
22,678

 
31,016

Other non-current liabilities
636

 
596

Total liabilities
394,174

 
354,384

Commitments and contingencies (Note 13)


 


Shareholders’ equity:
 
 
 
Common shares, without par value, 100,000 shares authorized; 18,855 and 18,702 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
552,506

 
551,925

Additional paid-in-capital
78,751

 
73,185

Accumulated deficit
(802,872
)
 
(713,974
)
Accumulated other comprehensive income
102,427

 
103,802

Total shareholders’ (deficit) equity
(69,188
)
 
14,938

Total liabilities and shareholders’ (deficit) equity
$
324,986

 
$
369,322


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

Table of Contents

Novelion Therapeutics Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net revenues
$
30,334

 
$
28,669

 
$
89,722

 
$
99,530

Cost of product sales
12,531

 
29,505

 
41,739

 
60,227

Operating expenses:

 

 

 

Selling, general and administrative
18,348

 
21,395

 
65,773

 
72,360

Research and development
9,031

 
17,112

 
31,157

 
37,236

Restructuring charges
2,151

 
56

 
2,151

 
2,541

Total operating expenses
29,530

 
38,563

 
99,081

 
112,137

Loss from operations
(11,727
)
 
(39,399
)
 
(51,098
)
 
(72,834
)
Interest expense, net
(12,022
)
 
(9,897
)
 
(34,501
)
 
(28,722
)
Other (expense) income, net
(926
)
 
49

 
(1,961
)
 
176

Loss before provision for income taxes
(24,675
)
 
(49,247
)
 
(87,560
)
 
(101,380
)
Provision for income taxes
(133
)
 
(497
)
 
(1,338
)
 
(762
)
Net loss
$
(24,808
)
 
$
(49,744
)
 
$
(88,898
)
 
$
(102,142
)
Net loss per common share—basic and diluted
$
(1.32
)
 
$
(2.67
)
 
$
(4.74
)
 
$
(5.49
)
Weighted-average common shares outstanding—basic and diluted
18,854

 
18,648

 
18,772

 
18,599


See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


4

Table of Contents

Novelion Therapeutics Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(in thousands)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(24,808
)
 
$
(49,744
)
 
$
(88,898
)
 
$
(102,142
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation
(35
)
 
(124
)
 
(1,375
)
 
1,032

Other comprehensive (loss) income
(35
)
 
(124
)
 
(1,375
)

1,032

Comprehensive loss
$
(24,843
)
 
$
(49,868
)
 
$
(90,273
)

$
(101,110
)
 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


5

Table of Contents

Novelion Therapeutics Inc.
Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity 
(in thousands, except share information)
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
Common
 
Additional
 
 
 
Other
 
Total
 
Stock
 
Paid-In
 
Accumulated
 
Comprehensive
 
Shareholders’ 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Income
 
Equity
Balance at December 31, 2017
18,701,935


$
551,925


$
73,185


$
(713,974
)

$
103,802


$
14,938

Net loss






(32,828
)



(32,828
)
Foreign currency translation adjustment








655


655

Stock-based compensation expense




906






906

Vesting of restricted stock, net of shares withheld for taxes
1,276




(3
)





(3
)
Fair value allocated to warrants




3,277






3,277

Balance at March 31, 2018
18,703,211


551,925


77,365


(746,802
)

104,457


(13,055
)
Net loss






(31,262
)



(31,262
)
Foreign currency translation adjustment








(1,995
)

(1,995
)
Stock-based compensation expense




937






937

Vesting of restricted stock, net of shares withheld for taxes
17,036




(25
)





(25
)
Issuance of common stock under employee stock purchase plan
132,066


581


(141
)





440

Balance at June 30, 2018
18,852,313


552,506


78,136


(778,064
)

102,462


(44,960
)
Net loss






(24,808
)



(24,808
)
Foreign currency translation adjustment








(35
)

(35
)
Stock-based compensation expense




618






618

Vesting of restricted stock, net of shares withheld for taxes
2,658




(3
)





(3
)
Balance at September 30, 2018
18,854,971


$
552,506


$
78,751


$
(802,872
)

$
102,427


$
(69,188
)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



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Novelion Therapeutics Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
Nine Months Ended September 30,
 
2018
 
2017
Cash used in operating activities
    
 
    
Net loss
$
(88,898
)
 
$
(102,142
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
1,339

 
1,452

Amortization of intangible assets
18,822

 
18,778

Stock-based compensation
2,461

 
3,419

Non-cash interest expense
29,504

 
24,205

Provision for inventory excess and obsolescence
213


18,859

Unrealized foreign exchange loss (gain)
2,705

 
(195
)
Amortization of debt issuance costs
235

 

Deferred income taxes
946

 
106

Other non-cash operating activities
(7
)
 
16

(Gain) loss on change in fair value of embedded derivative liability
(606
)


Changes in assets and liabilities:

 
 
Accounts receivable
562

 
(5,177
)
Inventories
(1,776
)
 
1

Prepaid expenses and other assets
(4,038
)
 
757

Accounts payable
(2,999
)
 
(1,887
)
Accrued liabilities and other liabilities
(4,720
)
 
2,704

Net cash used in operating activities
(46,257
)
 
(39,104
)
Cash used in investing activities
 
 
 
Purchases of property and equipment
(435
)
 
(723
)
Net cash used in investing activities
(435
)
 
(723
)
Cash provided by financing activities
 
 
 
Net proceeds from term loan, net of debt discount
19,977

 

Issuance of common shares
409

 
174

Payment of term loan issuance costs
(698
)
 

Net cash provided by financing activities
19,688

 
174

Exchange rate effect on cash
(1,048
)
 
1,227

Net decrease in cash and cash equivalents
(28,052
)
 
(38,426
)
Cash and cash equivalents, beginning of period
55,430

 
108,927

Cash and cash equivalents, end of period
$
27,378

 
$
70,501

Supplemental disclosures of cash flow information
 
 
 
Cash paid for interest
$
6,823

 
$
3,250

Cash paid for taxes, net
$
2

 
$
1,386

Non-cash investing activities
 
 
 
Purchases of property and equipment included in accounts payable
$
12

 
$
22

 
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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Novelion Therapeutics Inc.
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, lomitapide and metreleptin. Lomitapide, which is marketed in the United States (“U.S.”) under the brand name JUXTAPID (lomitapide) capsules, is approved in the U.S. as an adjunct to a low-fat diet and other lipid-lowering treatments, including low-density lipoprotein (“LDL”) apheresis where available, to reduce low-density lipoprotein cholesterol (“LDL-C”), total cholesterol (“TC”), apolipoprotein B (“apo B”) and non-high-density lipoprotein cholesterol (“non-HDL-C”) in adult patients with homozygous familial hypercholesterolemia (“HoFH”). Lomitapide is also approved in the European Union (“EU”), under the brand name LOJUXTA, for the treatment of adult patients with HoFH, as well as in Japan, Canada, and a limited number of other countries. Metreleptin, a recombinant analog of human leptin, is currently marketed in the U.S. under the brand name MYALEPT (metreleptin for injection). MYALEPT is approved in the U.S. as an adjunct to diet as replacement therapy to treat the complications of leptin deficiency in patients with congenital or acquired Generalized Lipodystrophy (“GL”). 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 GL and Partial Lipodystrophy (“PL”). Additionally, both lomitapide and metreleptin are sold, on a named patient basis, in certain countries outside of the U.S. where such sales are permitted based on the approval of lomitapide and metreleptin in the U.S. or EU, such as Brazil.

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, 2018. 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, 2017 (“2017 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 nine months ended September 30, 2018, the Company incurred a net loss of $88.9 million and used $46.3 million in cash to fund operating activities. The Company, and Aegerion in particular, also has a significant level of indebtedness, consisting of (1) Aegerion's approximately $302.5 million principal amount of 2% convertible notes due August 15, 2019 (the “Convertible Notes”), as described in Note 8, Convertible Notes, net, (2) Aegerion's new $72.5 million secured term loans (the “Bridge Loans”), as described in Note 7, Loan Facilities, which have a stated maturity date of February 15, 2019, which maturity date is subject to extension upon the satisfaction of certain preconditions, which are also described in Note 7, Loan Facilities, and (3) Aegerion’s approximately $36.8 million principal amount of existing secured term loans owed to Novelion, which is also described in more detail in Note 7. These loan arrangements involve certain restrictions, including on cash usage, which is described in Note 7.

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. 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 stock has recently traded below $1.00. If its stock trades below $1.00 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.

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The Company’s anticipated operating cash usage and maturities of outstanding debt, and restrictions on intercompany cash payments, as described in Note 7, 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 alleviate 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, as described in Note 6, Restructuring. In November 2018, the Company announced that Aegerion has engaged advisors (who advised on the Bridge Credit Agreement) to undertake a comprehensive review of Aegerion’s capital structure and that Novelion and Aegerion have engaged advisors, respectively, to explore and advise the companies on all available financial and strategic options, such as a restructuring of Aegerion’s Convertible Notes (including a restructuring that would likely involve a debt for equity swap), a sale or merger of Novelion or Aegerion, or the sale or other disposition of certain businesses or assets, including territorial licensing transactions.

Although the Company believes its cost-reduction plan, together with the funds from the New Money Loans portion of the Bridge Loans (described below), will provide the Company and Aegerion with sufficient financing to meet its immediate operational needs and obligations through February 15, 2019, there is no guarantee that Aegerion will be able to successfully refinance the Intercompany Loan, its Convertible Notes, or the Bridge Loans, or that either Novelion or Aegerion will be able to otherwise raise capital to continue to operate as a standalone business beyond February 15, 2019. 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 (any of which could cause Novelion and/or Aegerion to use the protections of applicable bankruptcy laws to effectuate such alternative) will be critical for the Company to continue to execute on its commercial strategy and pursue its goals and objectives. 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, within one year after the date that the Unaudited Condensed Consolidated Financial Statements are issued.    

Should the Company be unable to execute its plans on an effective and timely basis, the Company’s business, result of operations, liquidity and financial condition would be materially and negatively affected, and the Company would be unable to continue as a going concern.

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 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

Effective January 1, 2018, the Company adopted Accounting Standards Codification (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and related ASUs, using the modified retrospective method. ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces most existing revenue recognition guidance including industry-specific guidance. The adoption of ASU 2014-09 and the related ASUs did not change the Company's revenue recognition and recognition of cost of product sales. As the Company did not identify any accounting changes that impacted the amount of net revenues, no adjustment to retained earnings was required upon adoption. Refer to Note 2, Revenue Recognition, for the required disclosures and a discussion of the Company's policies related to revenue recognition.


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New Accounting Standards Not Yet Adopted

On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (“ASU 2016-02”), its new standard on accounting for leases. The new guidance will require organizations that lease assets (referred to as lessees) for terms of more than 12 months, to recognize on the balance sheet the assets and liabilities associated with the rights and obligations created by those leases. Consistent with current guidance, the recognition, measurement, and presentation of the expenses and cash flows associated with a particular lease will depend on its classification as a capital or operating lease. However, unlike current GAAP, which only requires capital leases to be reflected on the balance sheet, ASU 2016-02 will require both types of leases to be recognized on the balance sheet. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018, and interim periods within those annual reporting periods. The Company engaged an external third party to assist with the adoption of, and is currently assessing the impact ASU 2016-02 will have on its consolidated financial statements.


2. Revenue Recognition

Prior to January 1, 2018, the Company applied the revenue recognition guidance in accordance with FASB ASC Subtopic No. 605-15, Revenue Recognition-Products (“ASC 605”). Effective January 1, 2018, the Company applies the revenue recognition guidance in accordance with FASB ASC Topic 606.

Prior to the second quarter of 2017, due to insufficient historical data to reasonably estimate the gross-to-net adjustments for rebates related to payors and insurance providers at the time of receipt by the Company's distributor for MYALEPT in the U.S., the Company accounted for MYALEPT shipments using a deferred revenue recognition model (sell-through method). Beginning in the second quarter of 2017, the Company determined that there was sufficient history to reasonably estimate expected rebates, and, to align its existing and anticipated revenue streams of products sold within the U.S., began recognizing sales of MYALEPT upon title transfer to distributors (sell-in method). Accordingly, the Company recognized a one-time increase in net revenue of $2.3 million resulting from this change in estimate in the second quarter of 2017, representing previously deferred product sales. As a result of the adoption of ASC Topic 606, net revenues associated with sales of MYALEPT during the three and nine months ended September 30, 2017 would have been consistent as the original amount recognized by the Company during the same period under ASC 605.

Additionally, in the second quarter of 2017, to improve distribution efficiency, the Company signed a letter of intent for the distribution of JUXTAPID with the same specialty pharmacy that distributes MYALEPT in the U.S. The agreement was finalized in October 2017, and the transition of this distribution model was completed in November 2017. Prior to the transition, the specialty pharmacy that distributed JUXTAPID did not take title to JUXTAPID; title was transferred upon delivery of JUXTAPID to the patients (sell-through model), and revenue was recognized upon the delivery to the patients, which is consistent with the accounting guidance under ASC Topic 606. Subsequent to completion of the transition, revenue from sales of JUXTAPID in the U.S. has been recognized upon title transfer to distributors (sell-in method) under ASC 605. Upon adoption of ASC Topic 606, there has been no change to revenue recognition.

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 and other territories. The following summarizes the revenue recognition for the respective revenue streams.

Product Sales Revenues

The Company recognizes revenue from sales of lomitapide and metreleptin at the point in time when control transfers, typically upon transfer of product to 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. Additionally, at period end, orders of the products may be in the process of fulfillment. In that event, if the related contract is for less than one year, the Company deems it unnecessary to assess whether a significant financing component exists and thus 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

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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 an analysis of the change in the government rebates for lomitapide and metreleptin for the period indicated:

 
Amount
 
(in thousands)
Balance as of December 31, 2017
$
13,471

Provision
18,530

Payments
(17,092
)
Balance as of September 30, 2018
$
14,909



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 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. To the extent the services provided by distributors are distinct and the fees are at fair value, these amounts are 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 it 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).
3. Inventories
The components of inventories are as follows:
 
September 30,
2018
 
December 31,
2017
 
(in thousands)
Work-in-process
$
26,127

 
$
22,579

Finished goods
24,951

 
27,247

Total
51,078

 
49,826

Less: Inventories - current
(19,120
)
 
(15,886
)
Inventories - non-current
$
31,958

 
$
33,940

A portion of inventory is classified as non-current as of September 30, 2018 and December 31, 2017 based on forecasted consumption exceeding one year. During the three and nine months ended September 30, 2018, the Company recorded $0.2 million of charges for excess or obsolete inventory in the Unaudited Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2017, the Company recorded $17.3 million and $18.9 million, respectively, for charges for excess or obsolete inventory in the Unaudited Condensed Consolidated Statements of Operations. The amount of the charge

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recorded was determined based on an analysis of forecasted sales activities, product shelf-life and the estimated fair value of the inventory.

4. Intangible Assets

Intangible assets are amortized over their estimated useful lives and reviewed for impairment when events and changes in circumstances indicate that the carrying amount may not be recoverable. During the three and nine months ended September 30, 2018 and 2017, there were no impairment charges recorded. Additionally, the Company reviewed the useful lives of the intangibles as of September 30, 2018 and believes the useful lives are still reasonable.

Intangible asset balances as of September 30, 2018 and December 31, 2017 are as follows:
 
 
 
 
 
 
 
September 30, 2018
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
(in thousands)
Developed technology - lomitapide
$
42,300

 
$
(7,214
)
 
$
35,086

Developed technology - metreleptin
210,158

 
(38,794
)
 
171,364

Total intangible assets
$
252,458

 
$
(46,008
)
 
$
206,450

 
 
 
 
 
 
 
December 31, 2017
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
(in thousands)
Developed technology - lomitapide
$
42,300

 
$
(4,262
)
 
$
38,038

Developed technology - metreleptin
210,158

 
(22,924
)
 
187,234

Total intangible assets
$
252,458

 
$
(27,186
)
 
$
225,272


    
Amortization expense was $6.3 million for both three-month periods ended September 30, 2018 and 2017 and $18.8 million for both nine-month periods ended September 30, 2018 and 2017.

As of September 30, 2018, the estimated amortization expense related to intangibles for future periods is as follows: 
 
 
 
Amount
Years Ending December 31,
(in thousands)
2018 (remaining 3 months)
$
6,273

2019
25,095

2020
25,095

2021
25,095

2022
25,095

Thereafter
99,797

Total intangible assets subject to amortization
$
206,450




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5. Accrued Liabilities

Accrued liabilities consist of the following:
 
September 30,
2018
 
December 31,
2017
 
(in thousands)
Accrued clinical costs
$
3,084

 
$
2,495

Accrued employee compensation and related costs
5,712

 
7,755

Accrued professional fees
4,214

 
4,118

Accrued sales allowances
14,909

 
13,471

Accrued royalties
3,863

 
3,588

Accrued restructuring costs
2,151

 

Other accrued liabilities
9,911

 
10,411

Total
$
43,844

 
$
41,838



6. Restructuring

In August 2018, the Company’s Board of Directors approved a cost-reduction plan which included a workforce reduction. The reduction in workforce eliminated 35 employees, or approximately 22% of the Company’s global active employees, across nearly all functions, and was substantially completed in the third quarter of 2018. As a result of the workforce reduction, the Company incurred restructuring charges of approximately $2.2 million in the third quarter of 2018, which will be paid out over the next 12 months. The restructuring charges include consulting fees related to the restructuring event and termination benefits, principally comprised of severance payments.

During the three and nine months ended September 30, 2017, the Company incurred $0.1 million and $2.5 million, respectively, in restructuring charges related to the consolidation of similar positions during the integration of the business subsequent to the acquisition of Aegerion. The restructuring charges consisted primarily of severance and benefits costs.

The following table sets forth the components of the restructuring charge and payments made against the reserve for the nine months ended September 30, 2018:


Amount

(in thousands)
Restructuring reserve balance at December 31, 2017
$

Costs incurred
2,151

Cash paid

Restructuring reserve balance at September 30, 2018
$
2,151



7. Loan Facilities

Short-term debt to Shareholders consists of the following:
 
September 30, 2018
 
(in thousands)
Note payable under term loan
$
20,000

Accrued unpaid interest
1,011

Unamortized debt issuance costs
(344
)
Unamortized related debt discount
(23
)
Relative fair value attributable to warrants
(3,396
)
Fair value attributable to embedded derivative
(881
)
Short-term debt to Shareholders
$
16,367




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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 Loan”), secured by substantially all of Aegerion’s assets, including a pledge of 65% of its 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 exceptions. The Shareholder Term Loan, was repaid in full in November 2018 in connection with entry into the Bridge Loans (as discussed below).
    
In connection with the Shareholder Term Loan Agreement, the lenders of the Shareholder Term Loan 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. Based on this model, the aggregate relative fair value of the Warrants was determined to be $3.4 million.

The Company allocated the proceeds received from the Shareholder Term Loan between the Shareholder Term Loan and the Warrants on a relative fair value basis at the time of the Shareholder Term Loan issuance. See the relative fair value of the Warrants determined as set forth above and Note 9, Fair Value of Financial Instruments, for further discussion on the relative fair value of the Shareholder Term Loan. The relative fair value of the Shareholder Term Loan was determined to be $16.6 million, and 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 and nine months ended September 30, 2018. 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 determined the acceleration of the maturity date upon the occurrence of a Convertible Notes restructuring to be an embedded derivative, which requires bifurcation and is separately ascribed with a fair value. See Note 9, Fair Value of Financial Instruments, for further discussion on the fair value of the embedded derivative liability. As a result, the Company initially recorded a derivative liability of $0.9 million as a reduction to long-term debt in its Unaudited Condensed Consolidated Balance Sheet. The derivative liability is revalued on each reporting date and is valued at $0.3 million at September 30, 2018.

As of September 30, 2018, the principal amount of the Shareholder Term Loan outstanding was $20.0 million, in addition to $1.0 million of unpaid interest accrued. At the time of repayment in November 2018, the outstanding principal of the Shareholder Term Loan was approximately $21.2 million, including paid in kind interest that had been added to the principal of the Shareholder Term Loan.

On November 8, 2018, Aegerion entered into a bridge credit agreement (the “Bridge Credit Agreement”) with certain funds managed by Highbridge Capital Management 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) February 15, 2019, unless extended pursuant to the terms and conditions of the Bridge Credit Agreement, in which case, June 30, 2019, and (iii) the acceleration after occurrence of an event of default. The February 15, 2019 maturity date of the Bridge Loans may be extended, at Aegerion’s option, to June 30, 2019, subject to the satisfaction of all of the following conditions: (A) Aegerion must make such request in writing to the Bridge Agent no later than February 1, 2019; (B) on or before February 15, 2019, Aegerion must have paid to the Bridge Lenders an extension fee in cash equal to 3.00% of the amount of each Bridge Lender’s then outstanding New Money Loans; (C) Aegerion must have provided to the Bridge Lenders or their counsel a term sheet setting forth the material terms of a sale (which may include a sale or merger of Novelion and one or more of its subsidiaries (but including Aegerion), or any other transaction having a similar effect or result) of Aegerion or its assets that, in the reasonable opinion of Aegerion, may be acceptable to Aegerion and its board of directors; (D) since the closing date of the Bridge Loans (the “Closing Date”), there shall not have been any event or circumstance, either individually or in the aggregate, that has had or would reasonably be expected to have a “material adverse effect” (as defined in the Bridge Credit Agreement), except for (1) matters set forth in any public filings of Novelion prior to the Closing Date, (2) any matters disclosed on the disclosure schedules to the Bridge Credit Agreement and related documentation as of the Closing Date, (3) such events disclosed in writing to the Bridge Lenders or its financial advisor prior to the Closing Date, and (4) any event or circumstance permitted by the terms of the Bridge Credit Agreement and related

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documentation; and (E) at the time of the effectiveness of the extension, the representations and warranties of Aegerion and each Guarantor contained in certain sections of the Bridge Credit Agreement and the related documentation shall be true and correct in all material respects (without giving effect to any “materiality,” “material adverse effect” or similar qualifiers) on and as of such date (before and after giving effect to such extension) unless such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date.

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 will pay a commitment fee equal to 2.00% of the New Money Loans provided on the Closing Date. The commitment fee will be paid in kind and be added to the outstanding principal amount of the New Money Loans. The New Money Loan 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 provided by the Bridge Lenders on the Closing Date. The Roll Up Loans may be prepaid, in whole or in part, by Aegerion without premium or penalty, but only to the extent all New Money Loans have been paid in full and such prepayment of the Roll Up Loans is otherwise permitted by the Bridge Intercreditor Agreement (as defined below).

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 (if any) and other 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 (as described in more detail below). 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 (as defined below). 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 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.

On the Closing Date, 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, in an aggregate principal amount of approximately $21.2 million, and (b) principal of the Intercompany Loan in an amount of $3.5 million.

Pursuant to the Bridge Credit Agreement, if Aegerion consummates certain territorial licensing transactions, the first $15.0 million of the net cash proceeds thereof will be retained by Aegerion, with $12.0 million to be used in accordance with a proceeds reinvestment budget provided by Aegerion, and the balance to be used in accordance with a general budget of Aegerion, in each case, subject to certain restrictions. The net cash proceeds from such licensing transactions in excess of $15.0 million are required to be used by Aegerion to repay New Money Loans and the Intercompany Loan pro rata on a 58% and 42% basis, respectively.

In connection with, and as a condition to, Aegerion’s entering into the Bridge Credit Agreement, Novelion, as lender under the existing amended and restated loan agreement for the Intercompany Loan, dated as of March 15, 2018 (the “Intercompany Loan Agreement”), between Aegerion, as borrower, and Novelion, consented to Aegerion’s incurrence of the Bridge Loans and the repayment of the Shareholder Term Loan, and amended the Intercompany Loan Agreement (the “Consent and Amendment”). Novelion also agreed to subordinate the Intercompany Loan to the New Money Loans pursuant to a subordination agreement with

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the Bridge Lenders and Bridge Agent (the “Bridge Intercreditor Agreement”). Under the terms of the Bridge Intercreditor Agreement, the New Money Loans and the liens securing the New Money Loans are senior to the liens securing the Intercompany Loan. The Intercompany Loan is not subordinated to the Roll Up Loans. Under the terms of the Bridge Intercreditor Agreement, the liens securing the Roll Up Loans rank junior to the liens securing the Intercompany Loan. Given that the Intercompany Loan is an intercompany loan, it has been eliminated in the consolidated financial statements.

Under the terms of the Bridge Credit Agreement and the Bridge Intercreditor Agreement, Aegerion is prohibited from making, and Novelion is prohibited from accepting, certain payments, such as payments in cash to Novelion, including for out-of-pocket costs incurred by Novelion, and services rendered by or on behalf of Novelion, for the benefit of Aegerion, unless such payments are approved by the lenders under the Bridge Credit Agreement (and the intercompany services agreements providing for such services cannot be amended without the prior approval of the lenders under the Bridge Credit Agreement). In addition, Aegerion has certain budgetary restrictions, and expenditures not included in an agreed-upon budget will generally require the approval of the Bridge Lenders, and if costs and revenues vary from the budget outside of certain permitted variances, it will be an event of default under the Bridge Loans and the Intercompany Loans. In connection with the Intercompany Loan Agreement and the Bridge Credit Agreement, Aegerion is 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 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 consideration for its consent to the Bridge Credit Agreement, Novelion received a consent fee of $0.2 million, representing 0.50% of the remaining outstanding principal balance of the Intercompany Loan, paid in kind and added to the outstanding principal amount of the Intercompany Loan.

Under the terms of the Consent and Amendment, the Intercompany Loan Agreement was amended to, among other things, (i) increase the interest rate on the Intercompany Loan from the current rate of 8.00% per annum to 8.50% per annum, effective as of January 1, 2019, (ii) to add Aegerion’s wholly-owned subsidiary, Aegerion Holdings, Inc. as a guarantor, (iii) require a mandatory prepayment from the proceeds of certain licensing transactions (as described above), (iv) permit the Bridge Loans to be senior to the Intercompany Loan, (v) require the liens securing the Roll Up Loans be subordinated to the liens securing the Intercompany Loan, (vi) modify reporting requirements and other covenants to align with the limitations of the Bridge Credit Agreement, and (vii) cross-default with any event of default under the Bridge Loans or the Convertible Notes. Interest on the Intercompany Loan accrues and compounds quarterly in arrears and is not be payable in cash until the stated maturity date or any earlier time that the Intercompany Loan becomes due and payable pursuant to the terms thereof. The stated maturity date of the Intercompany Loan is July 1, 2019.


8. Convertible Notes, net

The Convertible Notes are senior unsecured obligations of Aegerion. The Convertible Notes bear interest at a rate of 2.0% per year, payable semi-annually in arrears on February 15 and August 15, and have an effective interest rate of 16.42%, established as of the consummation of the Company's acquisition of Aegerion. The Convertible Notes will mature on August 15, 2019, unless earlier repurchased, converted or renegotiated.

The outstanding Convertible Notes balances as of September 30, 2018 and December 31, 2017 consist of the following:
 
 
 
 

September 30, 2018
 
December 31, 2017
 
(in thousands)
Principal
$
324,998

 
$
324,998

Less: debt discount
(37,968
)
 
(66,460
)
Net carrying amount
$
287,030

 
$
258,538



The following table sets forth total interest expense recognized related to the Convertible Notes during the three and nine months ended September 30, 2018 and 2017:

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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
 
(in thousands)
Contractual interest expense
$
1,625

 
$
1,625

 
$
4,875

 
$
3,250

Amortization of debt discount
9,887

 
8,063

 
28,493

 
15,805

Total
$
11,512

 
$
9,688

 
$
33,368

 
$
19,055



Future minimum payments under the Convertible Notes are as follows:
 
 
Years Ending December 31,
Amount
 
(in thousands)
2018
$

2019
331,498

 
331,498

Less amounts representing interest
(6,500
)
Less debt discount, net
(37,968
)
Net carrying amount of Convertible Notes as of September 30, 2018
$
287,030



On the Closing Date, under the terms of the Bridge Credit Agreement, the Roll Up Loans (consisting of new term loans under the Bridge Credit Agreement with an aggregate principal amount of $22.5 million) were deemed to have been funded and delivered, on behalf of Aegerion, to certain holders of Convertible Notes for the purchase of Convertible Notes in an equal principal amount outstanding, and Aegerion simultaneously directed the retirement of such Convertible Notes. 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 principal balance of Convertible Notes is approximately $302.5 million after the effect of this “roll up” of Convertible Notes with the proceeds of the Roll Up Loans under the Bridge Credit Agreement. At September 30, 2018, at least one shareholder of the Company holds Convertible Notes.


9. 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 September 30, 2018 are summarized in the table below: 

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Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Balance at September 30, 2018
 
(in thousands)
Assets:
 
 
 
 
 
 
 
Money market funds
$
7,003

 
$

 
$

 
$
7,003

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Embedded derivative liability
$

 
$

 
$
275

 
$
275


The fair value measurements of the Company’s financial instruments as of December 31, 2017 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, 2017
 
(in thousands)
Assets:

 

 

 

Money market funds
$
20,046

 
$

 
$

 
$
20,046

 

The fair value of the Convertible Notes, which differs from their carrying values, is influenced by interest rates, the Company’s share price and share price volatility and is determined by prices for the Convertible Notes observed in market trading which are Level 2 inputs. The estimated fair value of the Convertible Notes at September 30, 2018 and December 31, 2017 was $248.9 million and $258.3 million, respectively. See Note 8, Convertible Notes, net, for further information.

The fair value of the Shareholder Term Loan was determined using the Black-Derman-Toy interest rate lattice model. This model generates two probable outcomes of interest rates - one up and one down - emanating at each point in time starting from March 15, 2018 ("Shareholder Term Loan issuance date") to the loan's maturity date. The key inputs utilized in the valuation model, which include certain Level 3 inputs, consist of: (1) the volatility of interest rates based on historical volatility of interest rates observed and implied interest rates based on swaption trades; (2) credit spread applicable for the Term Loan; and (3) interest rate on the Shareholder Term Loan. Under this model, the relative fair value of the Shareholder Term Loan on the Shareholder Term Loan issuance date was determined to be $16.6 million.

The fair value of the embedded derivative liability on the Shareholder Term Loan issuance date was calculated by determining the fair value of the Shareholder Term Loan 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 Term Loan as discussed above. The difference between the two fair values was determined to be the fair value of the embedded derivative liability. The fair value of the embedded derivative liability will be remeasured at each reporting period, with changes in fair value recognized in the consolidated statement of operations. The change in the fair value of the embedded derivative liability year to date through September 30, 2018 was $0.6 million.

For the determination of the fair value of the Warrants, including the related valuation methodology and inputs, see Note 7, Loan Facilities, for further information.

The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable 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, exceed federally insured limits. The Company has not experienced any credit losses in these accounts and does not believe it is exposed to any significant credit risk on these funds.

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The Company is subject to credit risk from its accounts receivable related to product sales of lomitapide and metreleptin. 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 profile, 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.

10. 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, the purchasable employee stock purchase plan shares, 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 September 30,
 
2018
 
2017
 
(in thousands)
Stock options
2,632

 
1,838

Unvested restricted stock units
445

 
705

Potentially issuable employee stock purchase plan shares
33



Warrants
1,819

 
14,515

Convertible notes
1,619

 
1,619

Total
6,548

 
18,677



The outstanding warrants as of September 30, 2018 were issued in connection with the Shareholder Term Loan Agreement entered on March 15, 2018, as described in Note 7, Loan Facilities. The outstanding warrants as of September 30, 2017 were issued in connection with the Company's acquisition of Aegerion in fiscal year 2016, which warrants were cancelled unexercised during the three months ended March 31, 2018. Refer to Note 13, Share Capital, in the Notes to the Consolidated Financial Statements included in the 2017 Form 10-K for further details.

11. Income Taxes

The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. The Company provides a valuation allowance when it is more likely than not that deferred tax assets will not be realized.

The Company recorded a provision for income taxes of $0.1 million and $0.5 million for the three months ended September 30, 2018 and 2017, and $1.3 million and $0.8 million for the nine months ended September 30, 2018 and 2017, respectively. The provision for income taxes for the three months ended September 30, 2018 primarily consists of current tax expense, which relates primarily to the Company’s profitable operations in its foreign tax jurisdictions. The provision for income taxes for the nine months ended September 30, 2018 primarily consists of current tax expense, which relates primarily to the Company’s profitable operations in its foreign tax jurisdictions, and deferred tax expense, which relates to the establishment of a valuation allowance on the Company’s foreign deferred tax assets. The provisions for income taxes for the three and nine months ended September 30, 2017 consist of current tax expense, which relates primarily to the Company’s profitable operations in its foreign tax jurisdictions and U.S. alternative minimum tax.


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The realization of deferred income tax assets is dependent on the generation of sufficient taxable income during future periods in which temporary differences are expected to reverse. Where the realization of such assets does not meet the more likely than not criterion, the Company applies a valuation allowance against the deferred income tax asset under consideration. The valuation allowance is reviewed periodically and if the assessment of the more-likely-than-not criterion changes, the valuation allowance is adjusted accordingly. As of September 30, 2018, the Company has a full valuation allowance applied against its Canadian, U.S., and foreign deferred tax assets.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”) was enacted into law. The Act reduced the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. As a result of the Company's U.S. valuation allowance on its U.S. deferred tax assets, the Act did not have an impact on the provision for income taxes for the three and nine months ended September 30, 2018.

In conjunction with the Act, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. The Company recognized the provisional impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its audited consolidated financial statements for the year ended December 31, 2017. The Company completed its analysis of the deemed repatriated earnings and the revaluation of deferred tax assets and liabilities during the third quarter 2018. No measurement period adjustment to the Company’s provisional accounting was required.
 

12. 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 and Chief Operating Officer is the Company's chief operating decision maker (“CODM”). The Company does not operate any separate lines of business or separate business entities with respect to its products. Accordingly, the Company does not accumulate discrete financial information with respect to separate service lines and does not have separately reportable segments. Enterprise-wide disclosures about net revenues and long-lived assets by geographic area and information relating to major customers are presented below.

Net Revenues

The following table summarizes total net revenues from external customers by product and by geographic region, based on the location of the customer, for the three months ended September 30, 2018 and 2017.
 
Three Months Ended September 30,
 
2018
 
2017
 
U.S.
 
Japan
 
Brazil
 
Other Foreign Countries
 
Total
 
U.S.
 
Japan
 
Brazil
 
Other Foreign Countries
 
Total
 
(in thousands)
 
(in thousands)
Lomitapide
$
8,128

 
$
2,757

 
$

 
$
3,365

 
$
14,250

 
$
10,304

 
$
1,718

 
$

 
$
3,170

 
$
15,192

Metreleptin
12,293

 
91

 
706

 
2,994

 
16,084

 
11,311

 
24

 
96

 
2,046

 
13,477

Total
$
20,421

 
$
2,848

 
$
706

 
$
6,359

 
$
30,334

 
$
21,615

 
$
1,742

 
$
96

 
$
5,216

 
$
28,669


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 nine months ended September 30, 2018 and 2017.
 
Nine Months Ended September 30,
 
2018
 
2017
 
U.S.
 
Japan
 
Brazil
 
Other Foreign Countries
 
Total
 
U.S.
 
Japan
 
Brazil
 
Other Foreign Countries
 
Total
 
(in thousands)
 
(in thousands)
Lomitapide
$
27,228

 
$
7,560

 
$

 
$
9,098

 
$
43,886

 
$
32,236

 
$
3,531

 
$
5,939

 
$
10,224

 
$
51,930

Metreleptin
34,542

 
139

 
1,876

 
9,279

 
45,836

 
37,652

 
71

 
5,082

 
4,795

 
47,600

Total
$
61,770

 
$
7,699

 
$
1,876

 
$
18,377

 
$
89,722

 
$
69,888

 
$
3,602

 
$
11,021

 
$
15,019

 
$
99,530



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During the three months ended September 30, 2018 and 2017, net revenues generated from customers outside of the U.S., Japan and Brazil, as listed in the column “Other Foreign Countries,” were primarily derived from Colombia. Net revenues generated from customers located in other foreign countries were primarily derived from Canada, Colombia, France, and Italy during the nine months ended September 30, 2018 and from Colombia and Greece during the nine months ended September 30, 2017.

Significant Customers

For the three months ended September 30, 2018, one customer accounted for 67% of the Company’s net revenues and accounted for 50% of the Company's September 30, 2018 accounts receivable balance. For the three months ended September 30, 2017, two customers accounted for 75% of the Company's net revenues and 64% of the Company's September 30, 2017 accounts receivable balance.

For the nine months ended September 30, 2018, one customer accounted for 69% of the Company's net revenues, and for the nine months ended September 30, 2017, two customers accounted for 70% of the Company's net revenues.

Long-lived Assets

The Company’s long-lived assets are primarily comprised of intangible assets and property and equipment. As of September 30, 2018 and December 31, 2017, 100% of the Company's intangible assets were held by the Company's indirect wholly owned subsidiary, Aegerion. Of that, 65% of the intangible assets were attributable to Aegerion's U.S. business, with the remaining 35% attributable to Aegerion's European holding company, as of both September 30, 2018 and December 31, 2017.

As of both September 30, 2018 and December 31, 2017, 71% 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.

13. 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 September 30, 2018, $0.9 million remains due as a current liability, and $0.9 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 JUXTAPID or MYALEPT. Aegerion’s payment schedule is also subject to acceleration in the event that Aegerion fails to satisfy its payment obligations under the SEC Judgment.

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.

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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 September 30, 2018, $2.2 million remains due as a current liability, and $2.7 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 various complex and burdensome 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 September 30, 2018, $7.1 million remains due as a current liability, and $19.0 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 JUXTAPID or MYALEPT. 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 May 18, 2018, the DOJ and Aegerion filed a joint motion seeking a hearing concerning the status of the FDA Consent Decree, which does not take effect until it is approved by the Court and the injunction order is issued. On August 8, 2018, the DOJ and Aegerion filed a memorandum in support of the 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 various complex and burdensome 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


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Federal and state authorities 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 of the industry association’s Code of Conduct, to which Aegerion Brazil is bound due to its affiliation with Interfarma. Also, the Board of Directors of Interfarma imposed an additional penalty of suspension of Aegerion Brazil’s membership, without suspension of Aegerion Brazil’s membership contribution, for a period of 180 days for Aegerion Brazil to demonstrate the implementation of effective measures to cease alleged irregular conduct, or exclusion of 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. 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. 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 Prosecutors in Paraná and São José dos Campos continue to gather information in connection with their respective investigations. At this time, the Company does not know whether the inquiries of the Public Prosecutors in Paraná or São José dos Campos will result in the commencement of any formal proceeding against Aegerion, but if Aegerion’s activities in Brazil are found to violate any laws or governmental regulations, Aegerion may be subject to significant civil lawsuits to be filed by the Public Prosecution office, and administrative penalties imposed by Brazilian regulatory authorities and additional damages and fines. Under certain circumstances, Aegerion could be barred from further sales to federal and/or state governments in Brazil, including sales of JUXTAPID and/or MYALEPT, due to penalties imposed by Brazilian regulatory authorities or through civil actions initiated by federal or state public prosecutors. Additionally, Aegerion continues to respond to inquiries from the SEC concerning the investigations by Brazilian authorities, and, in November 2018, entered into a tolling agreement with the SEC with respect to this matter. As of the filing date of this Form 10-Q, the Company cannot determine if a loss is probable as a result of the investigations and inquiry in Brazil and whether the outcome will have a material adverse effect on 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. United States ex rel Clarke v. Aegerion Pharm. Inc., No. 13-cv-11785-IT. 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. 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. As of the filing date of this Form 10-Q, 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.


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14. Subsequent Events

On November 8, 2018, Aegerion closed on the Bridge Loans and Novelion consented and agreed to certain matters in connection with the Bridge Loans, as described in Note 7, Loan Facilities.


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

Cautionary Statement Concerning Forward-Looking Statements

All statements included or incorporated by reference into this Form 10-Q, other than statements of historical fact, are “forward-looking statements” under, and are made pursuant to the safe harbor provisions of, the Private Securities Litigation Reform Act of 1995 and other applicable federal U.S. and Canadian laws, regulations and other legal principles. Forward-looking statements and information are often identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “forecasts,” “may,” “will,” “should,” “would,” “could,” “potential,” “guidance,” “continue,” “ongoing” and similar expressions, and variations or negatives of these words.

Examples of forward-looking statements and information include our statements regarding: the commercial potential for, and market acceptance of, our products; our estimates as to the potential number of patients with the diseases for which our products are approved or for which our product candidates are being developed; our expectations with respect to reimbursement of our products in the U.S. and elsewhere; our expectations with respect to named patient sales of our products in Brazil and in other countries where such sales are permitted; the potential for and possible timing of approval of our products in countries or regions where we have not yet obtained approval; our plans for further clinical development of our products; our expectations regarding clinical trials and future regulatory filings and interactions with regulatory agencies for our products, including potential marketing approval applications with respect to metreleptin to expand the indication for metreleptin in the U.S. and with respect to filing for approval of our products in additional jurisdictions; our expectations with respect to pricing and reimbursement approvals for metreleptin in the key European Union (“EU”) markets; our plans for commercial marketing, sales, manufacturing and distribution of our products; our expectations with respect to meeting the post-marketing commitments for our products; our expectations with respect to the impact of competition on our future operations and results; our beliefs with respect to our intellectual property portfolio for our products and the extent to which it allows us to exclusively develop and commercialize our products and product candidates; our expectations regarding the availability of data and marketing exclusivity for our products in the U.S., the EU, Japan and other countries; our expectations regarding our ability to comply with Aegerion’s settlement of the Department of Justice (the “DOJ”) and SEC investigations, including the payment of the penalties, restitution, and settlement amounts and the obligations contained in the settlement agreements and resulting from criminal probation; our beliefs that the DOJ and SEC investigations and the settlement could give rise to additional third party demands, claims or litigation, further investigations, or could impact Aegerion’s commercial operations, research and development activities, contracts and business; the possible outcomes of investigations in Brazil, and the possible impact and additional consequences of them on our business and the other factors that are significantly impacting named patient sales in Brazil; the anticipated results of our August 2018 workforce reduction and other cost control measures; our future expectation of cash use and ability and plans to restructure Aegerion’s convertible debt or access the debt or equity markets; our expectations regarding taxes, tax positions and other related matters; our forecasts and expectations regarding sales of our products, our future expenses, our cash position both on a consolidated and non-consolidated basis, and the timing of any future need for additional capital to fund operations and product development opportunities; our ability to manufacture and supply sufficient amounts of lomitapide and metreleptin, and diluent for use reconstituting metreleptin, to meet demand for commercial and clinical supplies; and our plans to address the substantial doubt about our ability to continue as a going concern and our review of financial and strategic alternatives.

The forward-looking statements contained in this Form 10-Q and in the documents incorporated into this Form 10-Q by reference are based on our current beliefs and assumptions with respect to future events, all of which are subject to change. Forward-looking statements are based on estimates and assumptions regarding, for example, our financial position and execution of our business strategy, resolution of litigation and investigations, future competitive conditions and market acceptance of products, the possibility and timing of future regulatory approvals, expectations regarding our core capabilities, the ability to successfully refinance its approximately $36.8 million secured loan from Novelion, its approximately $302.5 million principal amount of 2.0% convertible senior notes due August 15, 2019 (the “Convertible Notes”), or the new secured Bridge Loans with an aggregate principal amount of $72.5 million, which is scheduled to mature on February 15, 2019 (unless extended to June 30 as described below), or the ability of either Novelion or Aegerion to otherwise raise capital to continue to operate as a standalone business, each made in light of current conditions and expected future developments, as well as other factors that we believe are appropriate in the circumstances. Effecting a refinancing, or other wholesale recapitalization or other strategic alternative (any of which could cause Novelion and/or Aegerion to use the protections of applicable bankruptcy laws to effectuate such alternative) is highly speculative and will be critical for us to continue to execute on our commercial strategy and pursue our goals and objectives. Forward-looking statements are not guarantees of future performance, and are subject to risks, uncertainties and assumptions that are difficult to predict, including those incorporated by reference into the “Risk Factors” section of this Form 10-Q. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors may impact our operations or results. New risks may emerge from time to time. Past financial or operating performance is not necessarily a reliable indicator of future performance. Given these risks and uncertainties, we can give no

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assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them does occur, what impact such event will have on our results of operations and financial condition. Our actual results could differ materially and adversely from those expressed in any forward-looking statement in this Form 10-Q or in our other filings with the SEC.

This Form 10-Q also contains “forward-looking information” that constitutes “financial outlooks” within the meaning of applicable Canadian securities laws. This information is provided to give investors general guidance on management’s current expectations of certain factors affecting our business, including our financial results. Given the uncertainties, assumptions and risk factors associated with this type of information, including those described above, investors are cautioned that the information may not be appropriate for other purposes.

Except as required by law, we undertake no obligation to revise our forward-looking statements to reflect events or circumstances that arise after the date of this Form 10-Q or the respective dates of documents incorporated into this Form 10-Q by reference that include forward-looking statements. Therefore, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in these forward-looking statements.


Business Overview

We are a biopharmaceutical company dedicated to developing new standards of care for individuals living with rare diseases. All references in this Form 10-Q to “we,” “us,” “our,” the “Company” and “Novelion” refer to Novelion and its consolidated subsidiaries, including Aegerion Pharmaceuticals, Inc. (“Aegerion”) and its subsidiaries, which we acquired on November 29, 2016, unless the context suggests otherwise. Aegerion is our operating subsidiary and substantially all of our assets and operations reside at Aegerion. As described elsewhere in this Form 10-Q, Aegerion has a substantial amount of debt, including its Convertible Notes, under its new Bridge Credit Agreement as of November 8, 2018, and also as the borrower under the Intercompany Loan arrangement with Novelion. In light of these arrangements and their provisions, you are cautioned that Aegerion’s interests may not always be aligned with those of Novelion or its shareholders.

We have two commercial products:

Lomitapide is marketed in the United States (“U.S.”) under the brand name JUXTAPID (lomitapide) capsules (“JUXTAPID”). 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 EU, under the brand name LOJUXTA (lomitapide) hard capsules (“LOJUXTA”) for the treatment of adult patients with HoFH, as well as in Japan, Canada, and a limited number of other countries. In December 2016, Aegerion launched JUXTAPID as a treatment for HoFH in Japan. Aegerion receives sales milestones and royalties on net sales of LOJUXTA in the EU and certain other jurisdictions from Amryt Pharma plc (“Amryt”), to whom Aegerion out-licensed the rights to commercialize LOJUXTA in those jurisdictions in December 2016. Lomitapide is also sold, on a named patient sales basis, in Brazil and in a limited number of other countries outside the U.S. where such sales are permitted before regulatory approval in such country as a result of the approval of lomitapide in the U.S. or the EU. We filed for regulatory approval for lomitapide for the treatment of HoFH in Brazil in August 2018.

Metreleptin, a recombinant analog of human leptin, is marketed in the U.S. under the brand name MYALEPT (metreleptin) for injection (“MYALEPT”). 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 complications of leptin deficiency in patients with GL and Partial Lipodystrophy (“PL”). We plan to file for regulatory approvals for metreleptin for PL in the U.S. and for GL and PL in other key markets. We offer metreleptin through expanded access programs in countries where permitted by applicable regulatory authorities and under applicable laws, and generate revenues in certain markets where named patient sales are permitted based on the approval of metreleptin in the U.S. or the EU. As a result of our August 2018 Cost Reduction Plan (described in more detail below), we have suspended plans to develop metreleptin in hypoleptinemic metabolic disorder (“HMD”), a low leptin mediated metabolic disease, and other new indications. Our ability to resume such development activities is dependent on our ability to raise capital to fund such opportunities, which is largely dependent on our ability to restructure Aegerion’s convertible debt.

We also had one product candidate, zuretinol acetate (“zuretinol”), an oral synthetic retinoid in development for the treatment of certain indications of inherited retinal disease. Following a comprehensive effort to out-license or sell zuretinol, we have elected to return our rights to zuretinol to Retinagenix, LLC, the party from whom we licensed development rights.

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During the three months ended September 30, 2018, net revenues from sales of lomitapide and metreleptin totaled $30.3 million, of which $20.4 million was derived from prescriptions for lomitapide and metreleptin written in the U.S., and $9.9 million was derived from prescriptions written for and royalties on sales of lomitapide and metreleptin outside the U.S. During the nine months ended September 30, 2018, net revenues from sales of lomitapide and metreleptin totaled $89.7 million, of which $61.8 million was derived from prescriptions for lomitapide and metreleptin written in the U.S., and $27.9 million was derived from prescriptions written for and royalties on sales of lomitapide and metreleptin outside the U.S.

In August 2018, we implemented a cost-reduction plan, which included a workforce reduction, designed to put us on the path towards becoming cash flow positive and to generate positive earnings before interest, taxes, depreciation and amortization (EBITDA) at the Aegerion level (the “August 2018 Cost Reduction Plan”). The reduction in workforce eliminated 35 employees, which accounted for approximately 22% of our global active employees across nearly all functions, and approximately 36% of our global workforce including headcount and positions that were eliminated. The workforce reduction was substantially completed in the third quarter of 2018. The cost-reduction initiatives include, among others, the suspension of clinical development activities for additional indications for metreleptin, including HMD, as well as efforts to reduce outsourced services and IT infrastructure spending. As a result of the workforce reduction, we incurred restructuring charges of approximately $2.2 million in the third quarter of 2018, which will be paid out over the next 12 months. The restructuring charges include consulting fees related to the restructuring event and termination benefits, principally comprised of severance payments.

As of September 30, 2018, we had approximately $27.4 million in cash and cash equivalents, approximately half of which was held at the Novelion level, and half of which was held at the Aegerion level. Aegerion has a significant amount of debt outstanding at November 8, 2018, including approximately $302.5 million principal amount of 2.0% convertible senior notes due August 15, 2019 (the “Convertible Notes”), $72.5 million principal amount outstanding under the Bridge Credit Agreement (defined below) and approximately $36.8 million outstanding under the Intercompany Loan (defined below), which Bridge Credit Agreement and Intercompany Loan are described in the “Recent Corporate and Securities Transactions” section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additionally, to resolve certain DOJ and SEC investigations regarding Aegerion’s U.S. commercial activities and disclosures related to JUXTAPID, Aegerion is, among other obligations, required to pay an aggregate of approximately $40.1 million in civil penalties, restitution and settlement amounts (plus interest) over three years (which obligations Aegerion has been timely paying and of which $32.8 million remained outstanding as of September 30, 2018). See Note 13, Commitments and Contingencies, in the Notes to Unaudited Condensed Consolidated Financial Statements for further information regarding our legal proceedings.

In the near-term, we expect that the majority of our revenues will continue to be derived from sales of JUXTAPID and MYALEPT in the U.S. We also expect to generate revenues from (i) sales in those countries outside the U.S. in which we have or expect to receive marketing approval, are able to obtain pricing and reimbursement approval at acceptable levels, and elect to commercialize the products, and (ii) sales of both products in a limited number of other countries where they are, or may in the future be, available on a named patient sales basis as a result of approvals in the U.S. or EU. We expect that in the near-term, our largest sources of revenues after the U.S., on a country-by-country basis, will be sales of JUXTAPID in Japan. We have had, and expect to continue to have, named patient sales of metreleptin in Brazil, Colombia, Argentina, Turkey, France and a select number of other markets. Named patient sales for metreleptin in France and other EU countries where they currently take place are expected to convert to commercial sales upon, and subject to, pricing and reimbursement approval in such countries. We expect net revenues from named patient sales to fluctuate significantly quarter-over-quarter given that named patient sales are derived from unsolicited requests from prescribers and, particularly in Brazil, are subject to increasingly stringent requirements and scrutiny, as noted further below. In some countries, including Brazil, orders for named patient sales are for multiple months of therapy, which can lead to further fluctuation in sales depending on the ordering pattern.

We expect that our near-term efforts will be focused on the following:

supporting our products in a compliant manner;

continuing to review our capital structure, and pursuing other strategic alternatives;

managing our costs and expenses to better align with our revenues so as to further our objective of becoming cash flow positive and generating positive EBITDA;

continuing to sell JUXTAPID as a last-line treatment for adult HoFH patients in the U.S., despite the availability of PCSK9 inhibitor products, which have had a significant adverse impact on sales of JUXTAPID, and gaining market acceptance in the other countries, including Japan, where lomitapide is approved and being commercialized, and Argentina, where lomitapide is approved and where we expect to launch late in the fourth quarter of 2018;

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continuing to support patient access to and reimbursement for our products in the U.S. without significant restrictions, particularly given the availability of PCSK9 inhibitor products in the U.S., which has adversely impacted reimbursement of JUXTAPID, and given the potential number of eligible JUXTAPID patients in the U.S. who are on Medicare Part D and the significant percentage of such patients who may not be able to afford their out-of-pocket co-payments for our products because prior sources of financial support through patient assistance programs operated by independent charitable 501(c)(3) organizations may no longer be available to some patients;

continuing to support sales of lomitapide as a treatment for HoFH in Brazil on a named patient sales basis, particularly in light of local economic challenges, the regulatory approval of Amgen’s PCSK9 inhibitor product in April 2016, the potential availability of that and other PCSK9 inhibitor products on a commercial basis in Brazil, ongoing government investigations, an ongoing court proceeding reviewing the regulatory framework for named patient sales in Brazil, and recently implemented regulatory requirements for named patient sales which have added significant hurdles and complexity to the process for named patient sales in Brazil and we believe have led a significant number of patients to discontinue therapy with lomitapide, and continuing to support named patient sales in other key countries where such sales are permitted, despite the availability of PCSK9 inhibitors on a commercial basis in such countries;

building and maintaining market acceptance for MYALEPT in the U.S. for the treatment of complications of leptin deficiency in GL patients and for MYALEPTA for GL and PL patients in the EU, and supporting named patient sales of metreleptin in GL in Brazil, particularly in light of the risks applicable to named patient sales in Brazil, as described above, and supporting such sales in other key countries, including Turkey, where such sales are permitted;

gaining regulatory, pricing and reimbursement approvals to market our products in countries in which the products are not currently approved and/or reimbursed or for new indications, including seeking regulatory approval of JUXTAPID for HoFH in Brazil and MYALEPT for PL in the U.S., obtaining pricing and reimbursement approvals for MYALEPTA in the key markets of the EU, and seeking regulatory approval of metreleptin in Brazil and other key markets as a treatment for complications of leptin deficiency in GL and PL patients;

preparing for the launch of MYALEPTA in the EU as a treatment for complications of leptin deficiency in patients with GL and PL, including undertaking commercialization and supply chain efforts, such as negotiating and entering into contracts with third parties on a timely basis, and maintaining relationship with third parties we rely on, to supply, among other things, labeled drug product, water for injection and administration kits containing ancillary items to reduce medication errors, such as appropriately sized reconstitution administration syringes, needles, and vials, and detailed instructions for use to pharmacies so that they can be dispensed to patients who are prescribed MYALEPTA;

focusing on and further developing patient support programs and similar initiatives to encourage eligible patients to commence and/or maintain with our products, to the extent permitted in a particular country;

Aegerion’s complying with the various agreements and judgments entered into with the DOJ and SEC described in Note 13, Commitments and Contingencies, in the Notes to Unaudited Condensed Consolidated Financial Statements, including: paying the remaining $32.8 million in civil penalties, restitution and settlement amounts (plus interest); and satisfying various complex and burdensome certification, disclosure, training, monitoring, and other requirements, as described in the “Legal Proceedings” section of our 2017 Form 10-K, filed with the SEC on March 16, 2018;

engaging in manufacturing-related activities to support uninterrupted supply of our products, particularly in light of the reduced capacity for, and resulting delay in, the manufacture of metreleptin at the facility of one of our contract manufacturers for metreleptin drug product, due to a warning letter it received from the FDA in 2017 and, more recently, supply interruptions at the facility, which has impacted recent batches of metreleptin drug product and caused uncertainties regarding when metreleptin drug product can once again be manufactured at the facility, which we have implemented plans to address, but, which if not adequately and timely addressed, could result in metreleptin drug product shortages starting in the fourth quarter of 2018;

obtaining adequate supplies of diluent for use with metreleptin in light of the global shortage of one of such diluents;

continuing to reinforce a culture of compliance, ethics and integrity throughout Novelion, Aegerion and their subsidiaries; and


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defending challenges to the patents or our claims of exclusivity for our products in the U.S., including against potential generic submissions with the FDA with respect to lomitapide, and expanding the intellectual property portfolio for our products.

Certain of the initiatives described above would require us to commit considerable financial and other resources, which we do not currently have, such as required trials to pursue FDA approval of metreleptin for PL. Also, any additional clinical development of lomitapide, pursuing clinical development of metreleptin in HMD, and exploring potential opportunities for metreleptin in additional indications, will require us to raise additional and considerable capital, which, as noted above, is highly speculative and may not be available.

Review of Financial and Strategic Alternatives

We announced that Aegerion has engaged advisors to undertake a comprehensive review of Aegerion’s capital structure (and who advised on the Bridge Credit Facility) and that Novelion and Aegerion have engaged advisors, respectively, to explore and advise the companies on all available financial and strategic options, such as a restructuring of Aegerion’s Convertible Notes (including a restructuring that would likely involve a debt for equity swap), a sale or merger of Novelion or Aegerion, or the sale or other disposition of certain businesses or assets, including territorial licensing transactions. Although we believe the August 2018 Cost Reduction Plan, together with the funds from the New Money Loan, will provide us with sufficient financing to meet our immediate operational needs and obligations through February 15, 2019, there is no guarantee that Aegerion will be able to successfully refinance its approximately $36.8 million loan to Novelion (i.e. the Intercompany Loan described below) or be able to successfully refinance its Convertible Notes, or the Bridge Loans, or that either Novelion or Aegerion will be able to otherwise raise capital to continue to operate as a standalone business. We cannot provide any assurance that the ongoing financial and strategic alternatives review will result in any particular alternative or transaction or funding. The forward-looking statements in this Form 10-Q assume that we are able to receive additional funding as a result of the financial and strategic review process, which is highly speculative. As such, we cannot conclude that such plans will be effectively implemented, or that such financing or strategic alternatives will be available.

Investigations and Legal Proceedings

As noted above, Aegerion has been the subject of certain investigations and other legal proceedings (some of which remain ongoing), including investigations of Aegerion’s marketing and sales activities of JUXTAPID by the DOJ and the SEC, and an investigation by federal and state authorities in Brazil to determine whether there have been violations of Brazilian laws related to sales of JUXTAPID. Aegerion entered into agreements (the “Settlement”) with the DOJ and the SEC in September 2017 that required Aegerion, in addition to paying certain penalties and Settlement amounts, to plead guilty to two misdemeanor misbranding violations of the Food, Drug and Cosmetic Act, to enter into a three-year DPA with regard to a charge that it engaged in a conspiracy to violate the Health Insurance Portability and Accountability Act (“HIPAA”), and to enter into a Consent Decree with the FDA regarding the JUXTAPID REMS Program. Aegerion was sentenced by the U.S. District Court on January 30, 2018 after the judge accepted Aegerion’s guilty criminal plea. Under the terms of the Settlement, including the sentence, Aegerion is required to pay approximately $40.1 million in aggregate penalties, plus interest, over three years, including $7.2 million of restitution, a civil penalty of $4.1 million to be paid to the SEC pursuant to an SEC Judgment, and $28.8 million (including $2.7 million designated for certain states), to be paid pursuant to the Civil Settlement Agreement, which is a significant financial burden given Aegerion’s financial condition, and also is required to comply with a series of ongoing compliance obligations. Aegerion has made the required Settlement payments on the respective payment due dates. As of September 30, 2018, the total outstanding Settlement payment due was $32.8 million. The FDA Consent Decree remains subject to approval by a U.S. District Court Judge. See Note 13, Commitments and Contingencies, in the Notes to Unaudited Condensed Consolidated Financial Statements and the “Legal Proceedings” section of our 2017 Form 10-K for further information on the Settlement and other matters.

Recent Corporate and Securities Transactions

Term Loan Agreement. On March 15, 2018, Aegerion entered into a loan and security agreement (the “Shareholder Term Loan Agreement”) with affiliates of Broadfin Capital, LLC (“Broadfin Capital”) and Sarissa Capital Management LP (“Sarissa Capital” and, together with Broadfin Capital, the “Shareholder Lenders”), pursuant to which the Shareholder Lenders made a single-draw term loan to Aegerion in an aggregate amount of $20.0 million, secured by substantially all of Aegerion’s assets (the “Shareholder Term Loan”), including a pledge of 65% of its 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 exceptions. The Shareholder Lenders or their affiliates are also investors in Novelion’s common shares, and two former members of Novelion's Board of Directors are affiliates of the Lenders. Concurrently with the execution of the Shareholder Term Loan Agreement, Novelion, Aegerion and the Lenders entered into a subordination agreement to subordinate the Shareholder Term Loan to the obligations of

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Aegerion to Novelion under the Amended and Restated Senior Loan Agreement (defined below) governing the Intercompany Loan, which was secured by the same collateral as the Shareholder Term Loan. The ShareholderTerm Loan was repaid on November 8, 2018, in connection with entry into the Bridge Loans (as discussed below).

In connection with the Shareholder Term Loan Agreement, the Shareholder Lenders were issued warrants to purchase 1,818,592 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 warrants remain outstanding.

In connection with Novelion’s business combination with Aegerion in 2016, Novelion entered into a secured loan facility with Aegerion (the “Intercompany Loan Agreement”). Since the consummation of the business combination, Aegerion has continued to borrow pursuant to the terms of the Intercompany Loan Agreement. 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 (the “Amended and Restated Intercompany Loan Agreement”), which amended and restated the Intercompany Loan Agreement. The aggregate outstanding principal amount of the loans and interest paid in kind under the Amended and Restated Intercompany Loan Agreement are collectively referred to as the “Intercompany Loan.” Given that the Intercompany Loan is an intercompany loan, it has been eliminated in the consolidated financial statements.

On November 8, 2018, Aegerion entered into a bridge credit agreement (the “Bridge Credit Agreement”) with certain funds managed by Highbridge Capital Management 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 affiliates of 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) February 15, 2019, unless extended pursuant to the terms and conditions of the Bridge Credit Agreement, in which case, June 30, 2019, and (iii) the acceleration after occurrence of an event of default. The February 15, 2019 maturity date of the Bridge Loans may be extended, at Aegerion’s option, to June 30, 2019 subject to the satisfaction of all of the following conditions: (A) Aegerion must make such request in writing to the Bridge Agent no later than February 1, 2019; (B) on or before February 15, 2019, Aegerion must have paid to the Bridge Lenders an extension fee in cash equal to 3% of the amount of each Bridge Lender’s then outstanding New Money Loans; (C) Aegerion must have provided to the Bridge Lenders or their counsel a term sheet setting forth the material terms of a sale (which may include a sale or merger of Novelion and one or more of our subsidiaries (but including Aegerion), or any other transaction having a similar effect or result) of Aegerion or its assets that, in the reasonable opinion of Aegerion, may be acceptable to Aegerion and its board of directors; (D) since the closing date of the Bridge Loans (the “Closing Date”), there shall not have been any event or circumstance, either individually or in the aggregate, that has had or would reasonably be expected to have a “material adverse effect” (as defined in the Bridge Credit Agreement), except for (1) matters set forth in any public filings of Novelion prior to the Closing Date, (2) any matters disclosed on the disclosure schedules to the Bridge Credit Agreement and related documentation as of the Closing Date, (3) such events disclosed in writing to the Bridge Lenders or its financial advisor prior to the Closing Date, and (4) any event or circumstance permitted by the terms of the Bridge Credit Agreement and related documentation; and (E) at the time of the effectiveness of the extension, the representations and warranties of Aegerion and each Guarantor contained in certain sections of the Bridge Credit Agreement and the related documentation shall be true and correct in all material respects (without giving effect to any “materiality,” “material adverse effect” or similar qualifiers) on and as of such date (before and after giving effect to such extension) unless such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct in all material respects as of such earlier date.

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 will accrue and compound quarterly in arrears and 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 will pay a commitment fee equal to 2.00% of the New Money Loans provided on the Closing Date. The commitment fee will be paid in kind and be added to the outstanding principal amount of the New Money Loans. The New Money Loan 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 provided by the Bridge Lenders on the Closing Date. The Roll Up Loans may be prepaid, in whole or in part, by Aegerion without premium or penalty, but only to the extent all New Money Loans have been paid in full and such prepayment of the Roll Up Loans is otherwise permitted by the Bridge Intercreditor Agreement (as defined below).


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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 (if any) and other 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 (as described in more detail below). 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 (as defined below). 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 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.

On the Closing Date, 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, in an aggregate principal amount of approximately $21.2 million and (b) principal of the Intercompany Loan in an amount of $3.5 million.

Pursuant to the Bridge Credit Agreement, if Aegerion consummates certain territorial licensing transactions, the first $15.0 million of the net cash proceeds thereof will be retained by Aegerion, with $12.0 million to be used in accordance with a proceeds reinvestment budget provided by Aegerion, and the balance to be used in accordance with a general budget of Aegerion, in each case, subject to certain restrictions. The net cash proceeds from such licensing transactions in excess of $15.0 million are required to be used by Aegerion to repay New Money Loans and the Intercompany Loan pro rata on a 58% and 42% basis, respectively.

In connection with, and as a condition to, Aegerion’s entering into the Bridge Credit Agreement, Novelion, as lender under the existing Amended and Restated Intercompany Loan Agreement consented to Aegerion’s incurrence of the Bridge Loans and the repayment of the Shareholder Term Loan, and amended the Amended and Restated Intercompany Loan Agreement (the “Consent and Amendment”). Novelion also agreed to subordinate the Intercompany Loan to the New Money Loans pursuant to a subordination agreement with the Bridge Lenders and Bridge Agent (the “Bridge Intercreditor Agreement”). Under the terms of the Bridge Intercreditor Agreement, the New Money Loans and the liens securing the New Money Loans are senior to the Intercompany Loan the liens securing the Intercompany Loan. The Intercompany Loan is not subordinated to the Roll Up Loans. Under the terms of the Bridge Intercreditor Agreement, the liens securing the Roll Up Loans rank junior to the liens securing the Intercompany Loan.

Under the terms of the Bridge Credit Agreement and the Bridge Intercreditor Agreement, Aegerion is prohibited from making, and Novelion is prohibited from accepting, certain payments, such as payments in cash to Novelion, including for out-of-pocket costs incurred by Novelion, and services rendered by or on behalf of Novelion, for the benefit of Aegerion, unless such payments are approved by the lenders under the Bridge Credit Agreement (and the intercompany services agreements providing for such services cannot be amended without the prior approval of the lenders under the Bridge Credit Agreement). In addition, Aegerion has certain budgetary restrictions, and expenditures not included in an agreed-upon budget will generally require the approval of the Bridge Lenders, and if costs and revenues vary from the budget outside of certain permitted variances, it will be an event of default under the Bridge Loans and the Intercompany Loans.

In consideration for its consent to the Bridge Credit Agreement, Novelion received a consent fee of $0.2 million, representing 0.50% of the remaining outstanding principal balance of the Intercompany Loan, paid in kind and added to the outstanding principal amount of the Intercompany Loan.


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Under the terms of the Consent and Amendment, the Amended and Restated Intercompany Loan Agreement was amended to, among other things, increase the interest rate on the Intercompany Loan from the current rate of 8.00% per annum to 8.50% per annum, effective as of January 1, 2019, to add Aegerion’s wholly-owned subsidiary, Aegerion Holdings, Inc. as a guarantor, require a mandatory prepayment from the proceeds of certain licensing transactions (as described above), permit the Bridge Loans to be senior to the Intercompany Loan, require the liens securing the Roll Up Loans be subordinated to the liens securing the Intercompany Loan, modify reporting requirements and other covenants to align with the limitations of the Bridge Credit Agreement, and cross-default with any event of default under the Bridge Loans or the Convertible Notes. Interest on the Intercompany Loan accrues and compounds quarterly in arrears and will not be payable in cash until the stated maturity date or any earlier time that the Intercompany Loan becomes due and payable pursuant to the terms thereof. The stated maturity date of the Intercompany Loan is July 1, 2019.

Financial Overview

Net revenues totaled $30.3 million and $89.7 million for the three and nine months ended September 30, 2018, primarily generated from sales of lomitapide and metreleptin. Approximately 2% of net revenues were derived from royalties on sales of lomitapide and metreleptin made by our sublicensees in the EU and other territories for the three and nine months ended September 30, 2018.

Cost of product sales totaled $12.5 million and $41.7 million for the three and nine months ended September 30, 2018, representing costs of selling lomitapide and metreleptin, and the intangible amortization recorded for the periods.

Selling, general and administrative (“SG&A”) expenses decreased from $21.4 million in the three months ended September 30, 2017 to $18.3 million in the three months ended September 30, 2018, and from $72.4 million in the nine months ended September 30, 2017 to $65.8 million in the nine months ended September 30, 2018