Alector, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; filed August 12, 2019. Alector is a clinical-stage biotechnology company developing immuno-neurology therapies for neurodegenerative diseases. It had no approved products and no product-sale revenue.
Financial results and liquidity
Amounts in millions of dollars except per-share data. Q2 and six-month figures are compared with the corresponding 2018 periods.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $6.9 | $7.1 | $12.5 | $12.0 |
| Research and development expense | $25.6 | $16.8 | $46.2 | $28.5 |
| General and administrative expense | $8.4 | $2.5 | $14.2 | $4.9 |
| Operating loss | $27.2 | $12.2 | $47.9 | $21.5 |
| Net loss | $24.6 | $11.1 | $43.1 | $19.6 |
| Net loss per share, basic and diluted | $0.36 | $1.00 | $0.77 | $1.78 |
- Revenue was primarily collaboration revenue from AbbVie: $6.9 million for Q2 and $12.5 million for the six months. The company recognized revenue as it incurred eligible program costs; $162.1 million of deferred revenue remained at June 30.
- Six-month operating cash use was $41.6 million. Investing activities used $124.8 million, largely reflecting purchases of marketable securities and $11.4 million of property and equipment. Financing provided $170.2 million, principally from the February IPO.
- At June 30, cash and cash equivalents were $69.2 million and marketable securities were $341.7 million, totaling $410.9 million. Restricted cash was $1.5 million. Accumulated deficit was $157.6 million.
- The February IPO raised $168.2 million net from 9.74 million shares sold at $19 per share. Preferred shares converted into common stock; 68.83 million common shares were outstanding at June 30.
- No conventional borrowings are reported. Operating lease liabilities totaled $47.9 million, with $73.7 million of undiscounted future lease payments. Current assets were $414.6 million versus current liabilities of $67.1 million.
- Margins are not a meaningful measure for this pre-commercial company; it reported operating and net losses.
Material changes versus prior comparable periods
- Q2 revenue decreased $0.2 million year over year, attributed to lower AL003 contract-manufacturing costs and consequently less AbbVie revenue recognized. Six-month revenue rose $0.5 million, mainly from higher AL002 activity, partly offset by the absence of prior-year grant revenue.
- Q2 R&D expense increased $8.8 million and six-month R&D increased $17.7 million. Drivers included greater personnel costs, AL101 development, early-stage programs, clinical work on AL001 and AL002, and new headquarters costs.
- Q2 G&A expense increased $5.9 million and six-month G&A increased $9.2 million, reflecting headcount and stock compensation, public-company costs, headquarters expenses, consulting, and a lease-asset impairment.
- Net losses widened substantially as operating expenses rose. Higher interest income partly offset operating losses.
- The IPO and preferred-stock conversion materially increased common shares and stockholders’ equity; the company reported positive stockholders’ equity of $245.7 million at June 30, compared with a deficit of $97.4 million at year-end 2018.
Outlook, commentary, risks, and unusual items
- Management expected existing cash, cash equivalents, and marketable securities to fund operations and capital needs through at least 12 months from the filing date, but stated that substantial additional funding would be needed over time. Spending was expected to increase with clinical and research programs; actual cash needs may exceed estimates.
- Pipeline plans: AL001 entered a Phase 1b study in FTD-GRN patients; AL002 Phase 1b in Alzheimer’s disease began in Q2; AL003’s Phase 1 ascending-dose study in healthy subjects began in Q1. Management expected to begin AL101’s Phase 1 study in the second half of 2019 and AL001 Phase 2 in the second half of 2019.
- After quarter-end, Alector reported initial AL001 data presented in July 2019 showing plasma and cerebrospinal-fluid progranulin levels restored to the expected normal range; it characterized this as proof of mechanism. It expected AL001 proof-of-concept data in the first half of 2020 and AL002 proof-of-mechanism data in the second half of 2019. These were expectations, not completed outcomes.
- Alector recorded a $1.2 million impairment charge in Q2 related to subleasing part of its new headquarters. The 25,000-square-foot sublease began in June and had a 30-month term.
- On June 18, 2019, the company initiated confidential arbitration against former consulting co-founder Asa Abeliovich concerning alleged contractual breaches and misuse of confidential information. The company said the proceeding was at an early stage and its outcome could not be assessed.
- Key risks include early-stage clinical and regulatory uncertainty, reliance on AbbVie and other collaborators and contract manufacturers, future financing needs, intellectual-property exposure and arbitration, and potential share sales after IPO lockups. The filing states that shares representing approximately 85.9% of June 30 outstanding shares were restricted but could become saleable as early as August 6, 2019, subject to applicable restrictions and any lockup release.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The filing also says there were no material changes to contractual obligations versus the 2018 Form 10-K.
Important facts for investors to verify
- Clinical-trial progress, enrollment, safety, and whether projected AL001 and AL002 data and AL101 study timing were achieved.
- Cash burn and runway against the stated funding estimate, including the timing and terms of any future capital raising.
- AbbVie collaboration performance, deferred-revenue recognition, and any option, milestone, or other payments.
- Status and potential financial or intellectual-property consequences of the confidential arbitration.
- Lease commitments, sublease economics, and any further impairment or occupancy costs.
- Cash-flow disclosure consistency: the cash flow statement reports $167.5 million provided by operating activities for the first half of 2018, while the MD&A narrative describes $167.5 million as cash used. The filing text does not reconcile this wording discrepancy.