Aptevo Therapeutics Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Aptevo is a biotechnology company with four marketed products and investigational oncology and hematology candidates built around its ADAPTIR platform. The company spun off from Emergent BioSolutions on August 1, 2016; therefore, prior-period results include carve-out accounting and may not be fully comparable with standalone results.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $10.8 million | $10.2 million | $18.2 million | $18.3 million |
| Product sales | $10.8 million | $10.2 million | $18.1 million | $18.1 million |
| Operating loss | $10.7 million | $12.8 million | $20.2 million | $25.8 million |
| Net loss | $11.2 million | $12.8 million | $21.1 million | $25.7 million |
| Net loss per share | $0.53 | $0.63 | $1.01 | $1.27 |
| Gross margin on product sales | 45% | 36% | 65% | 45% |
- Revenue mix and trends: Q2 product sales rose 6%, led by IXINITY (+39%) and HepaGam B (+21%); WinRho fell 18% and VARIZIG fell 9%. Six-month product sales were essentially flat: IXINITY and HepaGam B gains were offset mainly by a 21% decline in WinRho.
- Costs: Q2 R&D declined 11% to $6.8 million; six-month R&D declined 19% to $12.7 million. Six-month SG&A rose 6% to $19.3 million, reflecting marketing, personnel and consulting costs. Other expense included $0.5 million of Q2 interest expense and $0.9 million for the six-month period.
- Margins and unusual item: Six-month cost of product sales fell 37%, partly because of a $3.0 million noncash settlement resolving a dispute with IXINITY manufacturer CMC over 2015 batches. Excluding that settlement, management reported a six-month gross margin of 48%, versus 45% a year earlier. A separate $7.0 million CMC reserve is to be applied to at least the next four batches through 2017, reducing related costs of goods sold as those products are sold; any unused reserve was payable to Aptevo by year-end 2017.
- Cash flow: Cash used in operating activities was $24.5 million for the first half, compared with $30.1 million in 2016. Investing activities provided $17.9 million, chiefly from investment maturities, net of purchases. Financing activities provided $19.2 million, including the $20.0 million Emergent promissory-note payment. Cash and cash equivalents increased $12.6 million to $22.3 million.
- Liquidity and debt: Cash, cash equivalents and short-term investments totaled $48.6 million at June 30; restricted cash was an additional $0.4 million. Current assets were $67.2 million and current liabilities $11.9 million. Long-term debt, net, was $18.7 million. The MidCap facility bears interest at LIBOR plus 7.60%, with principal payments scheduled to begin in August 2018 and final maturity on February 1, 2021.
Material changes, outlook and risks
- Management expects continuing operating losses and negative operating cash flow, and states it does not have sufficient cash to complete clinical development of its candidates. Based on current plans, cash, investments and available facility borrowings are expected to fund operations through at least the third quarter of 2018. The filing gives no specific revenue or earnings guidance.
- Aptevo failed to meet the MidCap minimum revenue covenant for the twelve months ended March 31, 2017. A May 2017 amendment waived the default and revised the covenants; the company reported compliance for the three and six months ended June 30. The amendment extended the second $15 million tranche draw period to March 2018, raised the exit fee from 5.75% to 6.75%, and permits a lien on intellectual property if the second tranche is drawn or cash, cash equivalents and investments fall below $25 million. Access to the tranche remains subject to conditions.
- IXINITY supply remains a key operational risk. CMC had significant manufacturing failures in 2015 and 2016; a successful new batch supplied the market in May 2017, and a new five-year supply agreement was signed in June 2017. The company says it does not currently anticipate an interruption, but a shortage could harm sales and commercial viability.
- MOR209/ES414 remains in Phase 1 after weekly dosing led to anti-drug antibodies in most patients, potentially reducing active drug levels. The trial restarted with continuous intravenous infusion; efficacy and prevention of antibodies are uncertain. Under the June amendment, Aptevo bears 75% of development costs through August 2017, 49% from September 2017 through 2018, and 36% thereafter. MorphoSys has specified convenience-termination rights, including during the last two weeks of August 2017.
- In July 2017, Aptevo and Alligator Bioscience entered a collaboration to develop ALG.APV-527 through anticipated Phase II trials, with opt-out and stage-gate termination provisions. This was a subsequent event, after quarter-end.
- Other prominent risks include dependence on third-party manufacturers and collaborators, continued commercial acceptance of marketed products, clinical and regulatory uncertainty, financing needs, and potential dilution. The company reported no material pending legal proceedings and stated disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether product sales—particularly IXINITY and HepaGam B—can offset declining WinRho sales and sustain the reported margin improvement after the CMC settlement and reserve benefits.
- IXINITY manufacturing reliability, inventory adequacy, and the realization and timing of the $7.0 million CMC reserve benefits or repayment.
- MOR209/ES414 clinical results, the impact of anti-drug antibodies, and whether MorphoSys continues the collaboration under the amended cost-sharing and termination terms.
- Cash burn and runway assumptions, conditions for drawing the additional $15 million, future covenant compliance, and consequences of the $25 million cash threshold and potential IP lien.
- Development spending and progress across the pipeline, including the terms, cost allocation and opt-out or stage-gate outcomes of the Alligator collaboration.