SELLAS Life Sciences Group, Inc. quarterly report, Q1 FY2015

Business context and reporting period

This is Galena Biopharma, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2015, comparing Q1 2015 with Q1 2014. The request metadata names SELLAS Life Sciences Group, but the filing itself identifies Galena Biopharma as the registrant; investors should verify the issuer and filing identity.

Galena developed oncology candidates, including NeuVax, GALE-301 and GALE-401, and sold Abstral in the U.S. Zuplenz was licensed in 2014 but had not yet generated sales.

Financial results and liquidity

Revenue increased 27%, although gross revenue declined 14%; lower gross-to-net deductions—35% of gross revenue versus 55%—more than offset that decline. Cost of revenue plus acquired-intangible amortization was $0.54 million, equivalent to an approximate 80% gross margin on net revenue. Operating expenses totaled $13.88 million, and the operating loss was about 405% of revenue.

Net loss worsened by $8.00 million, mainly because the non-cash gain from revaluing warrant liabilities was $1.15 million, compared with $9.79 million in Q1 2014. Research and development expense declined 13% to $5.91 million; selling, general and administrative expense rose 9% to $7.43 million.

Current assets were $57.32 million and current liabilities $33.96 million at March 31 (current ratio approximately 1.69). Total debt was approximately $7.53 million, including $3.99 million current and $3.53 million long-term; the loan carried an 8.45% coupon and was scheduled to mature in November 2016. Cash rose from $23.65 million at year-end, primarily due to $42.1 million of net equity and warrant financing, partly offset by operating cash use and debt payments.

Material changes and business developments

• Abstral net revenue grew despite lower gross sales. Prescription demand increased 8%, while non-voucher prescriptions increased 113%, which management attributed to its patient-support program and changes to patient assistance.
• Q1 operating cash use rose by $3.51 million year over year. Management attributed lower R&D expense mainly to completion of enrollment efforts in the Phase 3 PRESENT trial; higher SG&A reflected commercial expansion, infrastructure and professional fees.
• In March, Galena completed a public offering and other share sales. Common shares issued rose to 158.7 million from 130.1 million at year-end; 22.5 million warrants and 10.7 million options were outstanding at quarter-end. The filing also reports 161.7 million common shares outstanding on April 30.
• After quarter-end, the underwriters exercised an additional stock over-allotment option on April 10, generating $5.4 million of additional net proceeds. The offering’s total net proceeds, including that exercise, were reported as $40.8 million.
• Galena announced on April 14 that PRESENT enrollment was complete at 758 patients, 7.7% above the 700-patient protocol target; the primary endpoint was expected in 2018. Management expected GALE-301 Phase 2a top-line data and GALE-401 Phase 2 data during 2015.

Outlook, risks and unusual items

Management forecast 2015 net revenue from commercial products of approximately $15–18 million and expected to launch Zuplenz in Q2 2015. It expected existing cash and commercial revenue to fund operations for at least one year, but cautioned that this depended on plans and revenue assumptions. The company expected continuing operating losses and stated it might never achieve profitability; it could require additional financing and might need to scale back, terminate, merge or be acquired if funding were unavailable.

In April 2015, the FDA issued a warning letter following a 2014 Form 483 inspection, citing pharmacovigilance and adverse-event reporting processes. Galena said it had responded and was taking corrective action. The filing warns that further regulatory action could restrict products, manufacturing or marketing.

Other material risks include consolidated shareholder derivative and securities class-action litigation, an SEC investigation concerning outside investor-relations professionals, and an Actavis challenge to patents covering Abstral. Galena had recorded no liability for the shareholder claims; insurers were reserving rights, although reimbursing substantially all defense legal fees subject to those reservations. Galena bears 88% of specified Abstral patent-defense costs. The filing also reports $14.53 million of potentially cash-settleable warrant liabilities, remeasured at fair value, and $6.97 million of contingent purchase-price consideration.

Key facts for investors to verify

• Confirm that this Galena Biopharma filing—not a SELLAS filing—is the intended company and period.
• Track Abstral sales, gross-to-net deductions and customer concentration; four customers each represented about 20% or more of Q1 2015 revenue.
• Check whether Zuplenz launched as planned and whether the $15–18 million 2015 revenue outlook was achieved.
• Monitor cash burn, financing needs, share count and potential dilution from warrants, options and future share authorization requirements.
• Review progress and results for PRESENT, GALE-301 and GALE-401, as well as FDA warning-letter remediation and the identified legal, SEC and Abstral patent matters.