Filing summary
Entity note: The supplied filing is Cerecor Inc.’s Form 10-Q for the quarter ended September 30, 2018, not an Avalo Therapeutics filing. The summary below reflects the filing provided.
Business context and reporting period
Cerecor reported results for the three and nine months ended September 30, 2018. The company combines marketed pediatric products with drug-development programs in neurology and rare pediatric diseases. During 2018 it acquired Avadel’s pediatric products and, in September, Ichorion’s preclinical CDG programs; the TRx acquisition had closed in November 2017.
Key financial metrics
| Metric | Q3 2018 / September 30, 2018 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $4.1 million | Q3 2017: $25.0 million |
| Operating loss | $24.2 million | Q3 2017: operating income of $21.9 million |
| Net loss | $24.6 million; $0.71 per share | Q3 2017: net income of $18.7 million; $0.52 per share |
| Revenue, nine months | $13.3 million | Nine months 2017: $25.6 million |
| Net income (loss), nine months | $(34.5) million; $(1.05) per share | Nine months 2017: net income of $15.0 million; $0.65 per share |
| Product gross profit (revenue less product costs) | Q3: approximately $1.0 million, or 23.7% of product revenue; nine months: approximately $7.6 million, or 58.6% | Prior-year product sales were not reported |
| Cash and cash equivalents | $6.8 million; cash, cash equivalents and restricted cash totaled $7.1 million | December 31, 2017: $2.5 million cash and equivalents |
| Operating cash flow | Nine-month use of $1.2 million | Nine months 2017: $15.1 million provided |
| Debt | $15.4 million, including $1.1 million current | December 31, 2017: none reported |
| Current assets / current liabilities | $18.5 million / $24.9 million | December 31, 2017: $10.7 million / $11.1 million |
| Total liabilities / stockholders’ equity | $48.1 million / $19.5 million | December 31, 2017: $14.9 million / $27.9 million |
Q3 2018 operating expenses included $18.7 million of acquired in-process R&D from the Ichorion asset acquisition, recognized immediately because it had no alternative future use. The company also recorded $1.9 million of intangible-asset impairment for the terminated PAI marketing agreement during the nine-month period.
Material changes versus prior comparable periods
- Revenue shifted from the 2017 CERC-501 license sale to product sales: 2017 included $25.0 million of license revenue from Janssen, while 2018 revenue was principally marketed-product sales. Product revenue was $4.1 million in Q3 and $13.0 million for nine months; the prior-year periods had no product revenue.
- The 2018 reported loss reflects acquisition-related spending and the $18.7 million Ichorion IPR&D charge, alongside ongoing commercial, development, amortization, and sales-force costs. The 2017 profit chiefly reflected the CERC-501 transaction.
- Cash from operations declined to a $1.2 million use from $15.1 million provided in the prior-year nine months. The prior-year operating inflow included the CERC-501 sale proceeds.
- Debt, contingent consideration, goodwill, and intangible assets increased with the acquisitions. The company recorded $15.4 million of Deerfield debt assumed in the Avadel transaction and $9.5 million of contingent consideration at quarter-end.
- Cash and cash equivalents rose from year-end, supported in part by the August 2018 $3.9 million net equity placement with Armistice and collection of the $3.75 million CERC-501 escrow in August.
Outlook, commentary, and risks
- Management expected significant expenses and operating losses to continue and said additional financing would be needed to execute its development strategy and/or fund operations. It projected available cash, anticipated product cash flows, and planned financing or asset transactions could fund operations and debt payments through at least November 2019; that outlook depended on completing financing, out-licensing, or asset-sale actions on or before May 2019.
- Management planned to seek financing through equity or debt, collaborations, grants, licensing, or asset sales. Failure to obtain adequate funding could require spending reductions, delayed supplier payments, asset sales, or suspension or curtailment of programs; partnering could require relinquishing valuable rights.
- The company expected to file IND applications for two CDG programs in 2019 and planned to pursue the 505(b)(2) pathway for those programs. These candidates were preclinical, and development and regulatory outcomes remained uncertain. CERC-611’s clinical strategy was being reevaluated because a partial clinical hold limited exposure to subtherapeutic dosing.
- An arbitration panel’s interim ruling found no Ulesfia “Market Change” through the hearing date. Cerecor recorded $6.9 million of minimum purchase and royalty liabilities and a $6.1 million indemnity receivable, which it considered fully collectible. The final award was scheduled for December 4, 2018. Failure to make required payments could terminate the Ulesfia distribution agreement.
- Three customers represented approximately 34%, 31%, and 27% of Q3 product revenue, indicating substantial customer concentration. Product returns, rebates, chargebacks, and distributor fees require estimates and could differ from actual amounts.
- The Avadel debt requires quarterly payments of $262,500 through October 2020 and a $15.25 million balloon payment in January 2021. The company also disclosed future minimum Ulesfia purchase and royalty obligations totaling approximately $9.6 million before indemnification, and a new office lease with stated minimum payments of approximately $1.9 million.
- Management said disclosure controls were effective at a reasonable assurance level and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether planned financing or asset transactions were completed, and whether actual cash runway matched management’s November 2019 estimate.
- The final Ulesfia arbitration outcome, amounts ultimately payable, timing of payments, and collectibility of the $6.1 million indemnity receivable.
- Product-level sales, gross-to-net adjustments, customer concentration, and whether the commercial portfolio generates sufficient recurring cash to support operating costs.
- Progress and funding requirements for the CDG and neurology programs, including the two anticipated 2019 IND filings and CERC-611’s partial clinical hold.
- Debt repayment capacity, the January 2021 balloon obligation, acquisition-related contingent payments, and future product royalty and lease commitments.