Assembly Biosciences, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The unaudited filing reports a clinical-stage biotechnology company developing oral hepatitis B (HBV) therapies and microbiome-based treatments. It had no approved products and no product sales revenue.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Collaboration revenue | $2.66 million | $0 | $5.70 million | $0 |
| Research and development expense | $10.93 million | $8.83 million | $33.63 million | $24.47 million |
| General and administrative expense | $4.18 million | $2.85 million | $12.02 million | $8.94 million |
| Net loss | $12.27 million | $11.57 million | $39.80 million | $32.71 million |
| Basic and diluted loss per share | $0.71 | $0.67 | $2.30 | $1.90 |
- Revenue was collaboration-related, not product revenue. It included amortization of Allergan’s upfront payment and reimbursement of collaboration costs. Operating expenses substantially exceeded revenue; the filing does not present a meaningful product gross margin.
- At September 30, cash and cash equivalents were $27.25 million and marketable securities totaled $40.06 million, or approximately $67.30 million combined. Current assets were $68.65 million; current liabilities were $12.22 million.
- Total assets were $112.31 million and stockholders’ equity was $47.13 million, down from $79.88 million at year-end 2016. Accumulated deficit was $248.03 million. The balance sheet reports no debt; liabilities primarily include deferred revenue and accrued expenses.
- Nine-month operating cash flow was positive $11.63 million, principally because of $46.81 million in deferred revenue associated with Allergan’s upfront payment. Investing cash flow was negative $13.97 million; financing cash flow was positive $1.01 million, primarily from option exercises. Cash declined $1.33 million during the period.
- Management stated existing cash, cash equivalents and marketable securities were expected to fund operations and capital needs for at least 12 months. The company nevertheless expects continuing losses and says additional financing will be needed; it has no committed external funding source.
Changes versus prior comparable periods
- Collaboration revenue began in 2017 following the Allergan agreement; there was no revenue in the 2016 comparison periods.
- Q3 net loss increased about 6% year over year; nine-month net loss increased about 22%. Nine-month R&D expense rose about 37%, mainly from increased microbiome and HBV research, preclinical and clinical development activity. Nine-month G&A expense rose about 35%.
- Cash from operations changed from an outflow of $23.84 million in the first nine months of 2016 to an inflow in 2017, largely due to the collaboration’s upfront cash recorded as deferred revenue—not operating profitability.
Outlook, business developments and risks
- Allergan collaboration: Allergan paid $50 million upfront in February 2017. Assembly is eligible for up to approximately $630 million in development milestones, $2.15 billion in commercial development and sales milestones, and tiered royalties; these amounts depend on successful development and commercialization and are not assured. The parties share eligible costs through proof-of-concept up to $75 million, with Allergan assuming post-proof-of-concept costs. Allergan may terminate for convenience with 90 or 120 days’ notice, depending on trial status.
- Pipeline timing: ABI-H0731 had completed Phase 1a and was in Phase 1b. Management expected interim Phase 1b data in Q1 2018 and full results in the first half of 2018; subject to successful results, it expected a Phase 2a combination trial in mid-2018 and a larger Phase 2b trial in 2019. ABI-H2158 was in IND-enabling studies, with a Phase 1a trial expected in the second half of 2018, subject to successful completion.
- Microbiome program: The company prioritized ABI-M201 for ulcerative colitis and ABI-M301 for Crohn’s disease for further optimization and IND-enabling work. In September, it elected not to initiate a planned Phase 1b trial of ABI-M101 for recurrent C. difficile infection and said it would reassess development over the next 12 months.
- Revenue accounting: The $50 million upfront payment was recorded as deferred revenue and is being recognized over a 10-year service period; approximately $4.995 million was current deferred revenue and $41.815 million long-term at quarter-end. The company was assessing the new revenue standard, effective for it in 2018, and expected timing of collaboration revenue—particularly variable milestone consideration—could be affected.
- Principal risks: Early-stage clinical and preclinical programs may fail or be delayed; the company depends on third-party research and manufacturing, external financing and collaborators. Milestone and royalty proceeds are contingent, and Allergan can terminate. Management warned that insufficient funding could require spending cuts, program delays or discontinuation. The filing reports no material litigation and no off-balance-sheet arrangements.
- Post-quarter development: Chief Scientific Officer and Head of Microbiome Program Miguel S. Barbosa was to step down from those positions effective October 31, 2017, then serve as a strategic advisor under a consulting agreement.
Important facts for investors to verify
- Current ABI-H0731 Phase 1b results and whether the stated clinical-trial timelines were met.
- Progress, costs and financing needs for ABI-H2158 and the prioritized microbiome candidates, including the decision on ABI-M101.
- Allergan program progress, cost-sharing obligations, termination status and the conditions attached to potential milestones and royalties.
- Cash burn excluding the one-time collaboration upfront payment, the resulting runway, and whether additional financing is required.
- The effects of adopting the new revenue recognition standard on collaboration revenue timing and reported results.