Business context and reporting period
This is Mast Therapeutics, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed March 6, 2017. The filing is not a 2016 annual report for Savara Inc.; it describes Mast before its proposed merger with privately held Savara. Mast was a clinical-stage biopharmaceutical company with no approved products or commercial product revenue. Its lead candidate, AIR001, was in investigator-sponsored Phase 2 studies for heart failure with preserved ejection fraction (HFpEF). Following unsuccessful Phase 3 results for vepoloxamer in sickle cell disease, Mast discontinued its clinical development programs for that candidate.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $128,000 | None |
| Research and development expense | $20.8 million | $28.3 million |
| Selling, general and administrative expense | $9.3 million | $11.0 million |
| Operating loss | $36.5 million | $39.4 million |
| Net loss | $36.1 million | $39.8 million |
| Net cash used in operating activities | $37.3 million | $32.9 million |
| Cash, cash equivalents and investments at year-end | $11.3 million | $41.0 million |
| Working capital at year-end | $7.3 million | $19.1 million |
The $128,000 revenue was reimbursement under an NIH grant for a vepoloxamer nonclinical study, not product sales. No commercial gross margin was reported or meaningful for the business. The 2016 net loss included a $6.0 million impairment of vepoloxamer-related in-process research and development and a $2.4 million income tax benefit related to that impairment. Interest expense rose to $2.1 million from $0.6 million.
At December 31, 2016, the balance sheet reported $3.8 million of debt facility carrying value, including current and long-term portions; principal was approximately $3.3 million at year-end and $3.0 million as of March 2, 2017. The debt was secured by substantially all assets other than intellectual property, but included proceeds from its sale or licensing. Cash and investments fell by $29.7 million during 2016. Management estimated available capital would fund operations only into the second quarter of 2017 and disclosed substantial doubt about the company’s ability to continue as a going concern.
Material changes versus prior period
- R&D expense declined 26% year over year as vepoloxamer study and manufacturing activity wound down; AIR001-related clinical costs increased.
- Operating loss narrowed, but operating cash use increased by $4.3 million, and year-end cash, investments and working capital declined substantially.
- In September 2016, the vepoloxamer Phase 3 EPIC study failed to meet its primary and secondary efficacy endpoints. Mast discontinued the candidate’s clinical programs, recorded a $6.0 million impairment, and reduced its remaining IPR&D carrying value to $0.5 million.
- In the fourth quarter, Mast eliminated 18 positions and incurred approximately $0.8 million in restructuring costs. The company reported six full-time positions remaining as of March 2, 2017.
Outlook, risks and unusual items
In January 2017, Mast agreed to merge with Savara, with closing expected in the second quarter of 2017, subject to stockholder approval and other conditions. Former Savara securityholders were expected to own approximately 76% of the combined company and Mast holders approximately 24%, subject to adjustments. The proposed combined company would be named Savara Inc. and include Savara’s AeroVanc and Molgradex programs as well as AIR001. The merger was not completed as of the filing date.
Mast’s post-year-end amendment with Hercules would waive change-of-control repayment if the merger closed by April 30, 2017, but would impose minimum cash requirements and financing milestones on the combined company. Failure to meet those covenants could trigger default and accelerated repayment. If the merger did not close, Mast said it would need significant additional financing to continue operations and advance AIR001; financing, asset sales, an alternative transaction, or liquidation were possible paths.
Key operating risks include clinical and regulatory uncertainty, dependence on investigator-sponsored studies outside Mast’s control, single-source suppliers for AIR001 and its nebulizer, limited cash runway, debt covenants, potential exchange delisting, and the possibility that the merger would not close. Mast expected results from the INDIE-HFpEF Phase 2 study in the first quarter of 2018. The 2016 statements were audited with an unqualified opinion, which included a going-concern explanatory paragraph; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether and when the Savara merger closed, its final exchange ratio, reverse split, financing, and resulting ownership dilution.
- Actual cash runway and financing raised, and compliance with Hercules’ minimum-cash covenants and other debt terms.
- Progress, enrollment, safety and final results of AIR001 studies, especially INDIE-HFpEF and INABLE-TRAINING; interim findings are not proof of clinical benefit.
- Whether vepoloxamer assets were monetized and whether the impairment valuation based on third-party expressions of interest remains appropriate.
- Post-merger pipeline status, funding needs, and any changes to the disclosed outlook or material risks.