Alector, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Alector is a clinical-stage biotechnology company developing immuno-neurology therapies for neurodegenerative diseases. It had no approved products and no product-sales revenue.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $2.7 million | $6.5 million | $15.2 million | $18.5 million |
| Research and development | $28.5 million | $20.4 million | $74.8 million | $48.9 million |
| General and administrative | $8.3 million | $2.9 million | $22.5 million | $7.9 million |
| Operating loss | $34.1 million | $16.8 million | $82.1 million | $38.3 million |
| Net loss | $31.7 million | $15.3 million | $74.9 million | $34.9 million |
| Basic and diluted loss per share | $0.47 | $1.34 | $1.25 | $3.13 |
- At September 30, 2019, cash and cash equivalents were $87.0 million and marketable securities were $294.5 million; combined, these totaled $381.4 million. Accumulated deficit was $189.3 million.
- For the first nine months, operating cash use was $70.5 million, investing cash use was $78.9 million, and financing provided $170.9 million, mainly from the February IPO. Cash, cash equivalents, and restricted cash ended the period at $88.4 million.
- The IPO raised $168.2 million net. The company reported no material changes to previously disclosed contractual obligations. No borrowings are identified in the provided filing text; operating lease liabilities totaled $48.1 million, with $72.8 million of undiscounted lease payments.
- Operating margins are not meaningful as the company had no product sales and reported operating losses.
Material changes versus the prior comparable period
- Q3 revenue declined $3.8 million year over year; nine-month revenue fell $3.3 million. The company attributed the decrease to higher estimated total program costs following changes to the AL002 Phase 2 protocol, which reduced revenue recognized under the AbbVie agreement.
- R&D expense increased $8.1 million in Q3 and $25.8 million for the nine-month period, reflecting higher personnel costs, AL101 trial preparation, clinical program spending, and new headquarters and depreciation costs.
- G&A expense increased $5.4 million in Q3 and $14.6 million for the nine-month period, including higher headcount and stock compensation, public-company costs, headquarters expenses, consulting, and legal costs.
- Operating cash flow shifted from $145.1 million provided in the first nine months of 2018 to $70.5 million used in 2019. The 2018 inflow primarily reflected AbbVie’s $200 million upfront payment received in January 2018; the 2019 period included no comparable upfront receipt.
- Shares outstanding increased substantially following the IPO and conversion of all preferred stock into common stock. The filing reports 68,922,249 common shares outstanding at September 30, 2019.
Outlook, management commentary, risks, and unusual items
- Management estimated that available cash, cash equivalents, and marketable securities would fund operating expenses and capital requirements through at least 12 months from the filing date. It expects expenses and losses to increase and expects to need substantial additional funding in the future; the runway estimate depends on assumptions that may prove inaccurate.
- Management expected revenue for the next several years to come primarily from the AbbVie collaboration. Deferred revenue was $159.4 million at September 30, expected to be recognized over the programs’ R&D period. Revenue recognition is sensitive to revisions in estimated program costs; the filing says a 10% increase in forecast total costs in Q3 reduced revenue by approximately $5 million versus unchanged estimates.
- Pipeline progress and plans: AL001 entered Phase 2, with proof-of-concept data in FTD-GRN and FTD-C9orf72 patients expected in the first half of 2020; management planned to advance AL001 into Phase 3 for FTD-GRN in 2020 in consultation with the FDA. AL002 completed Phase 1a and entered Phase 1b in Alzheimer’s disease; proof-of-mechanism data were expected in the first half of 2020. AL003 began Phase 1b patient screening in Q4 2019. A Phase 1 study of AL101 was expected to begin in Q4 2019.
- Safety matters include two treatment-related serious adverse events in AL003 Phase 1a: aseptic hip monoarthritis in one participant and rash, fever, and thrombocytopenia in another. Both participants recovered after corticosteroid treatment. An AL002 non-human-primate toxicology study found eye inflammation; the company reported no drug-related serious adverse events among more than 50 participants in its Phase 1 trial and added ophthalmological assessments following FDA feedback.
- The company recorded a $1.2 million impairment charge on a lease right-of-use asset after subleasing part of its new headquarters. It adopted the new lease accounting standard in January 2019, recognizing right-of-use assets and lease liabilities.
- Alector initiated confidential arbitration in June 2019 against former consulting co-founder Dr. Asa Abeliovich over alleged breaches of agreement and misuse of confidential information. The proceeding was early-stage, and the company could not assess its outcome; related legal expense increased.
- Key risks include clinical efficacy and safety uncertainty, trial timing and enrollment, reliance on third-party manufacturers and research providers, dependence on AbbVie and other collaborators, potential need for additional financing and dilution, intellectual-property protection and disputes, and the arbitration. Management stated disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether AL001, AL002, AL003, and AL101 trial milestones and data timelines remain achievable, and what subsequent clinical and safety disclosures show.
- Whether the expected cash runway remains adequate as R&D spending increases, and whether additional financing or dilution becomes necessary.
- How revisions to AbbVie program cost estimates affect collaboration revenue, deferred revenue, and the timing of future cash receipts.
- Developments in the Abeliovich arbitration, related intellectual-property rights, and resulting legal costs or operational effects.
- Whether lease costs, headquarters utilization and sublease income, and the disclosed lease obligations evolve as expected.