Aptevo Therapeutics Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 14, 2016. Aptevo became an independent publicly traded company on August 1, 2016. Its 2015 comparative financial statements are carve-out results from Emergent BioSolutions and may not represent standalone performance, limiting comparability.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $9.4 million in 2016; $6.6 million in 2015 | $27.7 million in 2016; $25.3 million in 2015 |
| Product sales | $9.4 million; up 46% year over year | $27.5 million; up 40% year over year |
| Operating loss | $71.3 million; $55.7 million impairment included | $97.1 million; $55.7 million impairment included |
| Net loss | $71.7 million, or $3.55 per share | $97.5 million, or $4.82 per share |
| Cost of product sales | $6.2 million | $16.2 million |
| Research and development | $7.1 million | $22.9 million |
| Selling, general and administrative | $11.7 million | $30.0 million |
| Cash used in operating activities | Not presented for the quarter | $30.2 million; versus $41.1 million in 2015 |
Reported product gross margin was approximately 34% for the quarter and 41% for the nine-month period, calculated as product sales less cost of product sales; the figures include inventory write-offs. Q3 cost of product sales included a $2.9 million IXINITY inventory write-off. Total unsaleable inventory write-offs were $4.1 million in the first nine months.
At September 30, cash and cash equivalents were $10.9 million, short-term investments were $49.8 million, and restricted cash was $0.4 million. Management cited $61.1 million of cash, cash equivalents and marketable securities. Current assets were $79.4 million and current liabilities $15.2 million. Long-term debt, net, was $18.1 million; the company had drawn the $20 million first tranche of its credit facility. No event of default was reported. Nine-month investing cash outflow was $51.7 million, primarily reflecting purchases of investments and property and equipment; financing provided $88.2 million, including spin-off funding and debt proceeds.
Changes versus the prior comparable periods
- Q3 product sales rose $3.0 million, principally due to IXINITY sales of $2.8 million and higher VARIZIG sales. Nine-month product sales rose $7.8 million, primarily from IXINITY ($7.0 million) and VARIZIG.
- Nine-month total revenue increased only 9% because collaboration revenue fell to $0.2 million from $5.6 million, largely reflecting a $5.0 million MorphoSys milestone recognized in 2015.
- Nine-month R&D expense declined 16%, mainly due to lower IXINITY development spending and reduced otlertuzumab activity, partly offset by higher ROR1 and ADAPTIR-program spending. SG&A increased 4% for the nine months, including higher IXINITY commercial and spin-off costs.
- A September 30 impairment of $55.7 million—$41.8 million of in-process R&D associated with otlertuzumab and $13.9 million of goodwill—followed a significant post-spin-off stock-price decline. This noncash charge drove much of the increase in reported losses.
Outlook, risks and unusual items
- Management expected available cash, investments and credit-facility proceeds to fund operations for at least 12 months under current plans. The company expected operating losses to continue as it funds product development and commercialization.
- The $35 million credit facility has a drawn $20 million first tranche and a conditional $15 million second tranche. Availability of the second tranche depends on achieving $40 million of trailing-12-month net commercial product revenue and receiving an additional $20 million from Emergent. The loan bears interest at LIBOR plus 7.60%; principal payments begin in August 2018 and maturity is February 2021. Covenants include increasing minimum product-revenue requirements and restrictions on specified corporate actions.
- IXINITY faces a significant manufacturing and supply risk: its exclusive bulk-drug-substance manufacturer had released only one of nine lots ordered in 2015, and no lots had been successfully released in 2016 as described in the filing. The FDA rejected Aptevo’s proposed mitigation plan. The company anticipated interruption of the 1,500 IU assay in December 2016 and other dosage forms in January 2017, with potential harm to sales and commercial viability.
- MOR209/ES414’s Phase 1 trial was amended to continuous intravenous infusion after anti-drug antibodies developed in most patients receiving weekly doses, potentially lowering active drug levels. No related safety issues were observed. Recruitment began in October 2016, but efficacy of the revised regimen was uncertain. MorphoSys received a one-time termination right tied to year-end 2016 or review of the first six patients under the restarted trial; milestone payments and development cost-sharing terms were also reduced.
- Aptevo’s commercial products are WinRho, HepaGam B, VARIZIG and IXINITY; its pipeline includes Phase 1 MOR209/ES414, Phase 2 otlertuzumab and preclinical candidates. Key broader risks include reliance on third-party manufacturers and Emergent transition services, clinical and regulatory uncertainty, additional financing needs, debt covenants, and dependence on product sales. The filing reported no active legal proceedings and no material change in market-risk disclosures.
Most important facts for investors to verify
- Whether Emergent pays the $20 million unsecured promissory note and whether Aptevo satisfies conditions for the additional $15 million credit tranche.
- IXINITY manufacturing recovery, FDA-approved supply mitigation, actual interruption timing, and commercial impact.
- Updated MOR209/ES414 clinical results, anti-drug-antibody findings, and MorphoSys’s decision on its termination right.
- Assumptions underlying the $55.7 million impairment and whether further impairment indicators or charges arise.
- Product sales trends, inventory levels and write-offs, operating cash burn, liquidity runway, and compliance with revenue covenants.
- Standalone costs and operational readiness following the August 2016 spin-off, given that historical results include Emergent allocations.