Aptevo Therapeutics Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Filed May 12, 2017. Aptevo is a biotechnology company with four marketed products and investigational oncology and hematology candidates built in part on its ADAPTIR platform. The 2016 comparison predates the August 2016 spin-off and includes carve-out reporting; it may not be fully comparable with Aptevo’s standalone results.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Total revenue | $7.4 million | $8.1 million | Down 8%; product sales were $7.4 million, down 7%. |
| Operating loss | $9.5 million | $13.0 million | Improved by $3.4 million. |
| Net loss | $9.9 million | $12.9 million | Basic and diluted loss per share: $0.48 versus $0.64. |
| Gross profit / margin | $6.9 million / 93% | $4.5 million / 56% | 2017 includes a $3.0 million non-cash CMC settlement benefit; excluding it, Q1 2017 gross margin was 53%. |
| Cash flow from operations | $(12.0) million | $(14.1) million | Operating cash burn continued. |
| Cash and short-term investments | $60.9 million by balance-sheet arithmetic | — | At March 31; includes $14.0 million cash and $46.9 million short-term investments. Restricted cash was another $0.4 million. |
| Debt | $18.4 million, net | — | Credit facility principal originally drawn was $20.0 million; interest at LIBOR plus 7.60%. |
Product sales were mixed: WinRho fell 25% to $2.6 million; IXINITY rose 25% to $2.1 million; HepaGam declined 5% to $2.1 million; and VARIZIG declined 3% to $0.5 million. The company attributed lower sales mainly to WinRho’s comparison with stronger late-2016 sales and lower overseas HepaGam pricing. SG&A rose 13% to $10.5 million, while R&D fell 27% to $5.9 million. Other expense was $0.4 million, mainly reflecting interest on the MidCap loan.
Investing activities used $2.8 million, principally reflecting net purchases of investments and property and equipment. Financing activities provided $19.2 million, including the $20.0 million payment from former parent Emergent on a spin-off promissory note. Cash and cash equivalents increased by $4.3 million during the quarter.
Material changes and unusual items
- CMC settlement: An April 13, 2017 settlement resolved claims over IXINITY batches that failed manufacturing specifications. Aptevo owed no additional cash; the $3.0 million non-cash settlement reduced Q1 cost of product sales.
- IXINITY supply: After prior manufacturing failures and an FDA notice of potential supply interruption, a recent bulk drug batch was successfully manufactured. The company expected supply to be available beginning in May 2017 after routine finishing activities; interruption risk remained.
- Credit covenant amendment: At March 31, Aptevo failed the facility’s minimum net commercial product revenue covenant. On May 11, MidCap waived the default and revised covenants. The amendment extended the second-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 falls below $25 million.
- Capital and equity: Stock-based compensation was $1.7 million. Shares issued and outstanding were 21.2 million at March 31; 21.2 million were outstanding May 10.
Outlook, management commentary, and risks
Management expected operating losses and negative operating cash flow for the foreseeable future. Based on current plans and forecasts, it expected cash, investments, and credit-facility proceeds to support operations through the second quarter of 2018. The filing states that additional funding will be needed to complete development of product candidates; financing may require debt, equity, asset sales, or collaborations, and may not be available on acceptable terms.
- MOR209/ES414: In the Phase 1 study, most patients receiving weekly dosing developed anti-drug antibodies that reduced active drug concentration; no related safety issue was observed. A continuous-infusion protocol began in December 2016, but the filing cautions that it may not prevent antibodies or enable higher dosing. MorphoSys could terminate the collaboration by June 30, 2017, or after review of data from the first six patients dosed. Aptevo’s development-cost share was 75% through June 2017, then 49% through 2018, and 36% from 2019 onward.
- Manufacturing and development: The company depends on third-party manufacturers, including sole-source providers, and highlighted potential supply disruption, clinical delays, and regulatory approval uncertainty. Pipeline candidates remained at early clinical or preclinical stages.
- Debt and financing: Covenant failure could have exposed the company to acceleration of debt; the May amendment waived the existing default. Future covenant compliance, access to the second tranche, and the potential intellectual-property lien are important uncertainties.
- Controls and reporting: Management concluded disclosure controls were effective at a reasonable-assurance level at quarter-end. The filing also describes a previously identified material weakness and restatement of earlier periods related to deferred tax accounting; remediation and accurate reporting remain risks.
- Other: No material pending legal proceeding was identified. The filing reports no off-balance-sheet arrangements. Revenue-recognition changes were under evaluation for adoption in 2018.
Most important facts for investors to verify
- Confirm the post-quarter credit amendment, revised revenue covenants, default waiver, second-tranche conditions, increased exit fee, and circumstances under which MidCap may obtain an IP lien.
- Track cash burn and runway against the stated Q2 2018 estimate, including whether the second $15 million credit tranche becomes available.
- Check IXINITY finishing, supply availability, and whether manufacturing issues recur; reported gross margin depends materially on the one-time CMC settlement.
- Review MOR209/ES414 clinical data, the first-six-patient review, and MorphoSys’s termination decision and cost-sharing obligations.
- Reconcile liquidity disclosures: the balance-sheet cash and short-term investment totals equal approximately $60.9 million, while MD&A cites $61.3 million as available for general corporate use and separately reports $0.4 million restricted cash.
- Reconcile the filing’s accumulated-deficit disclosures: the balance sheet reports $90.6 million, while MD&A and risk-factor text cite $97.8 million.
- Assess progress remediating the previously reported material weakness and the implications of restated historical financial statements.