Outlook Therapeutics, Inc. quarterly report, Q3 FY2017

Business context and reporting period

Oncobiologics, Inc. (the registrant named in the filing; the request metadata names Outlook Therapeutics, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended June 30, 2017. The company was a clinical-stage biosimilar developer with no approved products and no product-sales revenue. Its lead candidates, ONS-3010 (adalimumab biosimilar) and ONS-1045 (bevacizumab biosimilar), had completed Phase 1 trials and were being prepared for Phase 3, subject to funding.

Financial results and liquidity

Gross margin was not separately reported; revenue consisted of collaboration and licensing revenue. For the nine-month period, operating cash use was $15.58 million, investing cash use was $0.27 million, and financing provided $13.64 million. Cash fell from $2.35 million at September 30, 2016 to $139,898 at June 30, 2017. Accumulated deficit was $179.9 million and stockholders’ deficit was $28.9 million.

At June 30, 2017, current liabilities were $39.27 million versus current assets of $1.19 million. The company reported $15.0 million principal of senior secured notes due December 2017 (with a $11.53 million net carrying value after discount) and $4.61 million of stockholder notes payable on demand. Total liabilities were $46.07 million. Management stated that cash on hand and $2.5 million received in July and August from the ONS-1045 emerging-markets license were expected to fund operations through September 2017.

Material changes versus prior comparable periods

• Third-quarter revenue declined 39% year over year to $0.30 million; nine-month revenue declined 63% to $0.91 million. Management attributed the decline primarily to lower deferred-revenue amortization after extending the estimated performance period, and, for the nine-month comparison, no milestone revenue versus $1.0 million in the prior year.
• Operating expenses fell 66% in the quarter and 22% over nine months. Lower clinical-development spending reflected postponement of planned Phase 3 trials until additional funding is secured; lower stock-based compensation and cost reductions also contributed.
• Net loss improved versus 2016, but the comparisons include substantial prior-year IPO-related compensation and, in 2017, a favorable $3.75 million quarterly and $3.98 million nine-month warrant fair-value adjustment. Interest expense increased to $1.64 million for the quarter and $3.16 million for nine months, largely due to the secured notes and amortization of debt discount.
• Operating cash use decreased from $35.11 million to $15.58 million for the nine-month period, partly reflecting working-capital changes, including higher accounts payable and accrued expenses; this should not be read as equivalent improvement in underlying cash burn.

Outlook, risks, and unusual items

Management disclosed substantial doubt about the company’s ability to continue as a going concern. It said substantial additional financing was needed beyond September 2017 and that unsuccessful financing could force further scale-backs or delays. Planned ONS-3010 Phase 3 enrollment of more than 500 patients was targeted for 2018, and the ONS-1045 global Phase 3 trial of more than 700 patients for mid-2018; both plans depended on obtaining funding or partners.

In July 2017, the company licensed ONS-1045 rights in emerging markets for $1.25 million upfront and a further $1.25 million upon a notice-and-acknowledgment milestone, plus potential upper-single-digit royalties. It also entered a 75-day exclusivity agreement, extendable twice by 20 days, with the same party for a potential strategic transaction. If no binding transaction results and the company enters an alternative transaction within three months after exclusivity ends, a $7.5 million break-up fee may apply. The filing cautions that no definitive strategic transaction was assured.

Other key risks include clinical and regulatory uncertainty, competition, market acceptance, dependence on future partnerships and financing, and the December 2017 note maturity and demand stockholder debt. Senior secured notes carry restrictive covenants and are secured by company assets, including intellectual property. No material pending legal proceedings or off-balance-sheet arrangements were reported.

Important facts for investors to verify

• Confirm the issuer identity: this filing is for Oncobiologics, Inc., not Outlook Therapeutics, Inc.
• Verify receipt and availability of the full $2.5 million ONS-1045 license proceeds and any subsequent strategic-transaction developments.
• Assess financing needs, the December 2017 senior-note maturity, and the $4.61 million stockholder notes payable on demand.
• Track whether funding or partnering enables the planned Phase 3 programs and whether trial timing or scope changes.
• Distinguish operating performance from noncash warrant remeasurement and working-capital effects when evaluating reported losses and cash burn.