3 Foot Crowbar: Aegerion’s Dropout Rate May Actually Be Closer to 50% or 60%

Dropout rates:

· Through direct communication and omission of material fact, Aegerion led investors to believe that the 2013 patient dropout rate was a stable 15%.

· Aegerion finally updated investors in late 2014, claiming a “blended” dropout rate of 36%. The stock price dropped 40% on the next day of trading.

· To reach that 36%, Aegerion distorted the rate downward when it “blended” the patients acquired in 2013 with new patients acquired in 2014.

· If 2013 patient dropout rates are reliable and if such also applies to future first year experiences, simple high school math shows that Aegerion’s relevant dropout rates are much worse than we have been led to believe, most likely between 50% and 60%.Aegerion’s disclosures explicitly admit that the dropout rate is material information, that they withheld this information, and that they are continuing to withhold this information.If we accept Aegerion’s claims that the majority of dropouts occur within the first two months of therapy, then we must abandon our dropout estimate for first year patients in 2014 and we must accept that Aegerion’s commercial enterprise is presently in the midst of an undisclosed marketing crisis.

Solve the Aegerion Puzzle:

The following puzzle rests upon a few assumptions:

1. That Aegerion did not misrepresent dropout rates for first year experience with its drug in 2013.²

2. That that rate would serve as sample for the first year experience of new patients in 2014. (Later, we will see what happens if we let go of this estimate.)

3. Thus, dropout for first year experience in 2013 was 15%, and we use that percentage to estimate dropout for patients in their first year in 2014.³

4. Given that Aegerion has not given investors an update on patient counts, we use a revenue derived estimate of 508 for the third quarter 2014.⁵

All other data points have been provided by Aegerion or are mathematically derived therefrom.

Skip to the next section to continue the report. For those who enjoy puzzles, on the right I present the kind of algebra required of any investor who wishes to understand the true risks involved with Aegerion. (Scroll down for the solution.)

Aegerion dropout puzzle

Basic Principle of Deception

Suppose an athlete ran the mile yesterday in 6 minutes. Today he stopped halfway at 3 minutes. Could I really convince anyone that his “blended” time of 4.5 minutes makes him a world class runner? Why wouldn’t I isolate yesterday’s distance and time from today’s half-distance unless I wished to mislead someone? If I wanted to include times for both days I must divide the data into three distinct time periods.

Yesterday’s race	· 1^st half of race: 3 minutes · 2^nd half of race: 3 minutes
Today’s race	· 1^st half of race: 3 minutes.

Similarly, Aegerion is working with two distinct cohorts over three time periods:

2013 Cohort	· 12 months: Patients acquired in 2013 tracked through 2013. The dropout rate for the first year was said to be 15%.[2] · 9 months: Patients acquired in 2013 tracked through the first nine months of 2014.
2014 Cohort	· 9 months: Patients acquired in the first nine months of 2014 and tracked through the first nine months of 2014. If Aegerion’s claims with the first year of the 2013 cohort are credible, we might use a 15% dropout rate for the 2014 cohort in their first nine months. (See Endnotes 1 and 3 for a detailed explanation.[3])

But even without using specific numbers we know that something is not right.

· Because dropouts occur over time, blending new patient additions with old patient additions necessarily distorts the dropout average downward and misleads investors into thinking that the problem is less than it really is.

Retailers, for example, use same store sales to isolate the mature portion of their business from the immature. Blending this year’s newly opened stores with last year’s established stores would necessarily distort the sales metric downwards.

Breaking down the case.

Aegerion’s Investors must resort to puzzle-solving in order to fill in the missing pieces. In the puzzle below, I will start with one set of inputs, as an illustration, but I encourage the reader to estimate a range of inputs and plug them into the equations. One will soon observe that even a wide range of estimates suggest that Aegerion may have misled investors.

Numbers provided by Aegerion

· There were 430 patients in the USA by the end of 2013.[4]

· The patient dropout rate through the first year, 2013, was 15%.²

· USA Revenue for the 3^rd Quarter 2014: $39,767,000.⁵ (The USA portion was 91% of total revenue, where product is sold month to month; international orders are multi-month shipments and would unnecessarily complicate the estimates.)

· Quarterly net cost of the drug at the end of September 2014: $78,277 per US patient.[5]

· The cumulative dropout for all patients over the entire time period was 36%.¹

Numbers derived from Aegerion’s reported numbers

· Dropout rate for 2014 patients, 9 months into 2014 (Green Cell, between cells F and G): A cumulative 15% dropout was claimed for first year patients at the end of 2013.² If Aegerion’s claim was credible, we can use this to estimate dropout for those patients acquired in 2014. (See Endnote 3 for detailed considerations.)³

· Remaining patients at the end of the cumulative (“blended”) time period from 1/2013 to 9/2014 (Last cell, Brown/orange, after cell J): Because Aegerion stopped reporting patient counts, we derive an estimate by dividing the third quarter 2014 revenue by the marketed price of the drug (IE, disclosed price minus disclosed discount). Sales in the USA are month to month.⁵

o $39,767,000 in revenue for the quarter divided by $78,277 cost per patient per quarter = 508 estimated patients at the end of the third quarter, 2014.⁵(“Value Insight” recently estimated Aegerion’s patient count to be 533 in a SeekingAlpha article.[6])

Solving the Puzzle that Aegerion has left investors

Basic algebra in 8 steps:

1. A - (A x .15) = 430

A = 430/.85

A x .15 = B

To say that 430 patients remain after a 15% dropout would be consistent with saying that the 430 remaining patients were 85% of the total patients introduced in 2013. A x .85 = 430 is the same as 430/.85 = A. A = 506. Of 506 patients introduced, 15% dropped out: 76.

· 430/.85 = 506

· 506 x .15 = 76.

· 506 – 76 = 430.

2. I - (I x .36) = 508

I = 508/.64

I x .36 = J

Step 2 follows the same procedure as step 1. If 508 patients remain after a reduction of 36%, then we would say that 508 was 64% or the original total. I x .64 = 508 is consistent with 508/.64 = I. I = 794. 36% of 794 means that we estimate 286 total dropouts over both 2013 and 2014.

· 508/.64 =794

· 794 *.36 = 286

· 794 – 286 = 508

3. I –A = F

If we have a total of 794 introduced to the drug over the entire time period and 506 of them were introduced in 2013, then how many were introduced in 2014? 288.

· 794-506= 288 new patients introduced in 2014.

4. (F x .15) = G

F - G = H

Aegerion claimed a stable 15% dropout among first year patients in 2013.² If this is reliable then in turn we use a 15% dropout rate for the first year patients in 2014. (See Endnote 3 for detailed considerations.³) If we’ve estimated that 288 patients were acquired in 2014, we then calculate that 43 dropped out and 245 remained.

· 288 * .15 = 43

· 288 – 43 = 245

5. 508 – H = E

If there were a total of 508 remaining patients at the end of September 2014, and 245 of them were from the 2014 cohort, then how many from the 2013 cohort remained in 2014?

· 508 -245 = 263.

6. J – G – B = D

Without “blending” in new patients acquired in 2014, how many of the patients who tried the drug beginning in 2013 dropped out in 2014? We have a cumulative 286 dropouts by the end of the third quarter 2014. We estimated that 43 of the patients acquired in 2014 dropped out in 2014, and 76 of the patients acquired in 2013 dropped out in 2013, which means that 167 of the patients acquired in 2013 dropped out in 2014.

· 286 – 43 – 76 = 167

7. D / 430 = C

So what percentage of the patients who remained on the drug at the end of 2013 dropped out by September 2014? Of the 430 patients remaining on the drug by 2013, 167 dropped out in 2014. That is a 39% dropout rate for the second year of use and in addition to the 15% reported dropout for the first year.

167/430 = .39

8. (D + B) / 506

If we isolated the patients acquired in 2013 and did not “blend” in new patients from 2014, how many of the patients acquired in 2013 dropped out by September 2014? We estimated that 76 dropped out in 2013 and 167 in 2014. That’s 48% of the 506 introduced in 2013.

(167+76)/506

· It is easy to understand why Aegerion presented the cumulative rate of 36% rather than rates from each isolated cohort. A responsible tally demonstrates that Aegerion’s 2013 cohort dropout rate has accelerated to 50%.

Lots of room for error

Although the laws of mathematics are immutable, the results are only as focused as the estimates we plug into them. Nonetheless, in Aegerion’s case the room for error is very wide.

Two variables which are lacking but which would render the puzzle a mathematically contained system are (1) the patient count as of September 2014 and (2) the dropout rate for patients acquired in the first nine months of 2014. If we found two reliable numbers here, the other numbers would yield to the inexorable laws of mathematics. I invite the reader to plug in a wide range of responsible estimates. It will become obvious that Aegerion has clearly distorted the relevant dropout numbers by “blending” the 2013 cohort with the newer patients acquired in 2014. There is a lot of room for error here:

# of estimated Patients Sept 2014	Dropout rate over 21 months for patients acquired in 2013
400	41%
450	44%
508	48%
550	51%
600	54%
650	57%

There is some suspicion in regards to patient counts. For example, Aegerion claimed to have 430 US patients on the drug at the end of 2013. However, deriving a patient count from revenue leaves us with an estimate of 304.[7] The difference, however, matters little. Either number – 430 or 304 -- shows a severe loss of patients over time. If we accept 430 as the number of patients at the end of 2013, then the drop-out rate for these patients over the 21 months to September 2014 would be approximately 50%; if we estimate there were approximately 304, then the drop-out rate would be approximately 60%.

I encourage the reader to take Aegerion’s disclosures and attempt any responsible input.

Aegerion omitted these material facts in 2013 and continues to do so in 2014

Although Aegerion suggested, and still suggests, that they know the dropout rate well enough to make stable projections they have not provided investors with the relevant information. The omission was deliberate. Here is a rejection by Aegerion of a request for crucial data:

“Yes, Tazeen, as Craig indicated, at the end of our Q4 call, we'd like to get away from quarterly quantification or qualitative statements around dropout compliance or non-patient starts.” ~ Aegerion Pharmaceuticals' (AEGR) CEO Marc Beer on Q1 2014 Results - Earnings Call Transcripthttp://seekingalpha.com/article/2201483-aegerion-pharmaceuticals-aegr-ceo-marc-beer-on-q1-2014-results-earnings-call-transcript?part=single

It is mathematically challenging for most dropouts to occur in the first two months

Here are Aegerion statements about dropouts occurring within two months of therapy:

“Mirroring what we saw in our Phase III study, we see drop-offs happen most frequently during the first 1 to 2 months of treatment.” ~ Aegerion Pharmaceuticals Management Discusses Q4 2013 Results - Earnings Call Transcript

Craig E. Fraser - President of US & International and Global Supply: “…. As Mark mentioned, the majority certainly do come off early when they do drop, particularly between shipment 1 and shipment 2 and then some more between shipment 2 and shipment 3, and then it becomes a much lower factor as time goes on. So you do have a bit of a factor of time. Most of that is frontloaded, though, when you are getting the drop-offs. Marc, if you have any …”

Marc D. Beer - Chief Executive Officer and Director: “That's my answer, my complete answer.” ~ Craig E. Fraser, Aegerion Pharmaceuticals' (AEGR) CEO Marc Beer on Q4 2013 Results - Earnings Call Transcript

If we accept that Aegerion’s disclosures in 2013 about patient dropouts were true and that they serve as a reliable measure of future first year patients, then the dropout for patients acquired in 2013 must have accelerated through 2014. If I say that the first slice of a pie is larger than the second slice, that second slice cannot be more than half of the pie. A responsible set of inputs shows that Aegerion’s dropouts in the second year exceed the first by more than 200%. Returning to the 2013 cohort highlighted in this report, we estimate that 167 dropped in 2014, only 76 dropped out in 2013. Again, it is mathematically impossible for the first slice of the 2013 cohort to be larger than the second slice when that second slice is more than half of the pie.

76 dropouts / 12 months in 2013 = 6 per month.

167 dropouts / 9 months in 2014 = 19 per month

If I have a tendency of 6 per month in 2013, how can I then say that it is more than the tendency of 19 per month in 2014?

To make Aegerion’s claim possible, at a minimum, the dropout rate for the 2013 cohort in 2014 would have to be less than it was in 2013, not more.

Letting go of the dropout rate for the 2014 cohort

We shall see what can happen if we do not accept the 15% dropout rate for the 2014 cohort. If we take Aegerion’s claim that the majority of dropouts occur in the first two months, then we would have to lower our estimated dropout rate for the 2013 cohort’s experience in 2014. As we saw in the previous section of this report, it would have to be lower than the first year’s rate of 15%.

There are several problems with this.

First, if we lower the dropout rate for the 2013 cohort in its second year to 10%, then in order to be consistent with the cumulative 36% rate, we must significantly raise the rate for the 2014 cohort -- to nearly 60%.

Introduced to Juxtapid

Dropout rate

Dropout count

Remaining patients

2013 patients in 2013

506

15%

76

430

US Patient count as claimed in 4th quarter & full year financial results

2013 patients in 2014

not applicable

10%

43

387

2014 patients in 2014

288

58%

167

121

2013-2014

794

36%

286

508

US patients, Revenue derived from 3rd Quarter 2014 income

Second, such an admission would mean that Aegerion’s current growth story is false: it would actually be a marketing catastrophe in the making.

Third, such an extreme and recent dropout acceleration would require specific disclosures of both the sudden acceleration of the dropout rate itself and the factors accounting for the extreme difference between this year’s experience and last year’s. I have found no such disclosure.

Conclusion

1. Aegerion’s use of a 36% “cumulative” rate distorts dropout rates downwards. Dropouts are much worse than Aegerion has made them appear. Relevant dropouts are probably closer to 50% or 60%.

2. Aegerion’s failure to disclose the relevant dropout rate constitutes an omission of material fact.

3. If we accept Aegerion’s claims that the majority of dropouts occur within the first two months of therapy, then we must abandon our dropout estimate for first year patients in 2014 and we must accept that Aegerion’s commercial enterprise is presently in the midst of an undisclosed marketing crisis.

What is the purpose of disclosing patient metrics if not to aid the investor in evaluating the business? Of two metrics available why provide the one which decreases awareness of risk unless one’s aim is to mislead investors?

In this last reporting period, Aegerion “blended” its 2014 patient data with ongoing data from patients acquired in 2013 and claimed a “cumulative” drop-out rate of 36%. Using basic algebra, one can deduce the reason why different cohorts and time periods were “blended” together: isolating patients acquired in 2013 and following them from the onset to the first 9 months of 2014, we calculate a relevant drop-out rate between 50% and 60%.

Aegerion had previously led investors to expect the drop-out rate to be 15%. Being ill-prepared for even the 36% blended rate, investors sold off their shares. The stock dropped over 40% on the day following the announcement. Obviously investors regarded this news as material. And given the facts presented in this report, it is clear that Aegerion has omitted material facts in previous reporting periods and is continuing to do so now.

Sources:

[1] 36% dropout:

“Currently, the cumulative dropout rate for all patients who have started therapy from the launch in January 2013 to the end of this September is 36%.” Aegerion Pharmaceuticals' (AEGR) CEO Marc Beer on Q3 2014 Results - Earnings Call http://seekingalpha.com/article/2690015-aegerion-pharmaceuticals-aegr-ceo-marc-beer-on-q3-2014-results-earnings-call-transcript

[2] 2013 10% and 15% dropout rates:

“Approximately six months into the U.S. commercial launch of JUXTAPID, the company has experienced a patient dropout rate of less than 10 percent …”

Aegerion Pharmaceuticals Announces Second-Quarter 2013 Financial Results http://www.sec.gov/Archives/edgar/data/1338042/000119312513308675/d575008dex991.htm

In the fourth quarter 2013 report, it updated the number:

“At the outset of the launch, we assumed an average dropout rate of 15% and we were successful in maintaining a dropout rate at the end of 2013 that was consistent with this estimate that we began the year with.” ~ Aegerion Pharmaceuticals Management Discusses Q4 2013 Results - Earnings Call Transcript http://seekingalpha.com/article/2051093-aegerion-pharmaceuticals-management-discusses-q4-2013-results-earnings-call-transcript?part=single

[3] Cumulative dropout rates have been accelerating as time passes. Thus, it is probable that, contrary to Aegerion’s claims, dropouts within a single cohort increase over time as adverse events accumulate. We follow this logic in the reconstruction of what may be happening with Aegerion’s 2014 dropouts. If the first year experience in 2013 was 15%, we use this rate to estimate the new patients in their first nine months in 2014. With these estimates we try to fill in the blanks: What is happening with the second year on the drug? What can we say about the 2013 cohort over 21 months?

Because dropouts are obviously accelerating and because the numbers for 2014 represent a shorter time period, at first glance it is tempting to use a percentage smaller than 15% to estimate dropouts for the 2014 cohort. However, a second glance suggests that 15% might be the better number after all. 15% is made up of an extremely small sample of two elements. Dropouts for the first six months of 2013 was said to be 10%. The cumulative rate for all of 2013 was said to be 15%. This means that dropouts for the second half of 2013 must have been around 20%. (10%+20%)/2 = 15%. In 2014 we are only working with 9 months, so it would seem reasonable to work with a number between 10% and 20%, given that dropout appears to be accelerating as time passes. Note however that if we do lower the dropout rate below 15% (green cell in the puzzle), then the dropout for patients acquired in 2013 and tracked in 2014 (Cell C) increases in proportion. For example, a 10% cumulative dropout for patients acquired in 2014 calculates a 42% dropout in 2014 for those patients who were acquired in 2013, while 15% calculates 39%. 15% here puts Aegerion in the better light when we get to the final tally for the 2013 cohort.

	Introduced to Juxtapid	Dropout rate	Dropout count	Remaining patients
2013 patients in 2013	506	15%	76	430	US Patient count as claimed in 4th quarter & full year financial results
2013 patients in 2014	not applicable	42%	181	249
2014 patients in 2014	288	10%	29	259
2013-2014	794	36%	286	508	US patients, Revenue derived from 3rd Quarter 2014 income

On the other hand, if this dropout rate is higher than 15%, then either Aegerion’s 2013 disclosures are suspect or Aegerion has not fully disclosed new factors in 2014 dropouts.

[4] 430 Patients:

“When we ended 2013, we ended with over 430 net revenue U.S. patients on therapy, and 37 x U.S. net revenue patients on therapy.” ~ Aegerion Pharmaceuticals Management Discusses Q4 2013 Results - Earnings Call Transcript http://seekingalpha.com/article/2051093-aegerion-pharmaceuticals-management-discusses-q4-2013-results-earnings-call-transcript?part=single

“We ended 2013 with over 430 net revenue U.S. patients on therapy …” ~ AEGERION PHARMACEUTICALS ANNOUNCES FOURTH-QUARTER AND FULL-YEAR 2013 FINANCIAL RESULTS http://www.sec.gov/Archives/edgar/data/1338042/000119312514068394/d683222dex991.htm

[5] Patient Count estimate for 3rd Quarter 2014:

“Net product sales for the third-quarter ended September 30, 2014 were $43.7 million, compared with $16.3 million in the third-quarter ended September 30, 2013. Net product sales for the nine months ended September 30, 2014 were $106.7 million, compared with $24.1 million for the nine months ended September 30, 2013. 91% of net product sales in the third quarter of 2014 were from prescriptions written for U.S. patients, while 9% came from ex-U.S. countries, primarily named patient sales in Brazil.” ~ Aegerion Pharmaceuticals Announces Third-Quarter 2014 Financial Results http://ir.aegerion.com/releasedetail.cfm?ReleaseID=879469

Price Hike mentioned in Jefferies presentation:

http://www.jefferies.com/CMSFiles/Jefferies.com/files/Conferences/060214/Presentations/Aegerion%20Pharma.pdf

Discount:

Mark J. Fitzpatrick: “Sure. The gross to net in the quarter is running at 5%, Cory. That's pretty consistent with what we're seeing year-to-date as well. It's still a little on the early side to assess our government commercial impairments and to be able to assess the Medicaid rebate in total, but we estimated conservatively as we book these things month by month, quarter by quarter, so it is a 5% number for the quarter and the year-to-date.” Aegerion Pharmaceuticals Management Discusses Q3 2013 Results - Earnings Call Transcript http://seekingalpha.com/article/1790502-aegerion-pharmaceuticals-management-discusses-q3-2013-results-earnings-call-transcript

To estimate a patient count for the 3^rd quarter, 2014, we divided the revenue by the net cost of the drug:

				43,700,000	Revenue 3rd Q '14
				39,767,000	91% US month to month sales
				3,933,000	9% Ex-US multi-month shipments
(Price was hike up twice since the launch)
329,587	5% discount	313107.7	4 quarters =	78,277	Per quarter per patient
				39,767,000/78,277=508
				508	Estimated US patients by Sept 2014

[6] 533 patient estimate:

“With estimated total patients at 3,000 in the United States, this would come to a total market share of only 16% (533 patients).” ~ “Aegerion's Current Valuations Demand Attention”, Value Insight http://seekingalpha.com/article/2734225-aegerions-current-valuations-demand-attention

[7] Fourth Quarter 2013 patient estimate: For the end of the first year, Aegerion claimed 430 patients.

This did not match up with a patient count derived from revenue. Using revenue for the fourth quarter of 2013 and dividing by the cost of Aegerion’s single product at the time, net of discounts, estimates a patient count for this quarter to be 304.

“Net product sales for the fourth-quarter ended December 31, 2013 were $24.5 million … 87% of our net product sales in 2013 were from our United States business.” ~ AEGERION PHARMACEUTICALS ANNOUNCES FOURTH-QUARTER AND FULL-YEAR 2013 FINANCIAL RESULTS http://www.sec.gov/Archives/edgar/data/1338042/000119312514068394/d683222dex991.htm

[article announcing discount. ]

24,500,000	Total Revenue for 4^th Q 2013.
21,315,000	87% US sales

295,000	Annual drug Cost per patient at the time (IE, before two price hikes to date)
280250	After 5% discount
70,063	Quarterly Cost

21,315,000/70,063=304
304	Estimated US patients for 4th quarter 2013
	(US sales / Quarterly Cost per patient)