Business context and reporting period
Wave Life Sciences Ltd. is a clinical-stage biotechnology company developing stereopure nucleic acid therapeutics for genetically defined diseases. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; financial figures below are in U.S. dollars.
Wave had no product sales. Revenue came from collaboration agreements with Pfizer and, beginning in April 2018, Takeda. Comparative 2017 figures were retrospectively revised for adoption of ASC 606.
Financial results and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $4.9 million | $1.1 million | $6.3 million | $1.5 million |
| Research and development | $32.5 million | $19.1 million | $61.7 million | $33.8 million |
| General and administrative | $8.9 million | $6.7 million | $16.9 million | $12.5 million |
| Net loss | $35.9 million | $24.6 million | $71.1 million | $45.7 million |
| Net loss per ordinary share | $1.23 | $0.91 | $2.49 | $1.81 |
Operating losses widened as spending increased faster than collaboration revenue. The filing does not present a gross margin measure; product revenue has not begun.
- Cash and liquidity: Cash and cash equivalents were $241.4 million at June 30, 2018, versus $142.5 million at year-end 2017; restricted cash was another $3.6 million. Current assets were $267.7 million and current liabilities $43.8 million.
- Cash flows, six months: Operating activities provided $39.0 million, investing used $3.1 million, and financing provided $63.1 million. Operating cash flow benefited substantially from collaboration funding and a $168.7 million increase in deferred revenue; it should not be read as recurring cash generation. Accounts receivable increased by $64.0 million.
- Debt and obligations: The balance sheet reports no material borrowings; capital lease obligations were minimal. Total liabilities were $206.6 million, including $177.2 million of deferred revenue.
- Equity and dilution: Takeda purchased $60.0 million of ordinary shares in April. Ordinary shares outstanding were 29.3 million at June 30, up from 27.8 million at December 31, 2017.
Material changes versus the prior comparable period
- Q2 revenue rose $3.8 million year over year, reflecting greater Pfizer research activity—including work on newly nominated targets—and revenue under the newly effective Takeda agreement. Six-month revenue increased $4.8 million.
- Q2 R&D spending increased $13.4 million and six-month R&D increased $27.9 million, driven by program activity, platform and discovery work, higher headcount, research supplies and facility costs. G&A rose $2.2 million for Q2 and $4.4 million for the six-month period, mainly from compensation and professional services.
- Six-month net loss increased $25.4 million. Despite the larger loss, operating cash flow turned positive from a $37.5 million use in the first half of 2017, primarily because of collaboration-related deferred revenue and receivables.
- ASC 606 adoption changed the timing and presentation of collaboration revenue. The 2017 comparisons in this filing are restated; the company used an input-based measure of progress for relevant research and development obligations.
Outlook, management commentary, risks and unusual items
- Management expects existing cash and cash equivalents to fund operations for at least the next 12 months, while cautioning that assumptions may prove incorrect and capital may be used sooner than expected. Wave anticipates rising R&D and G&A costs and may require substantial additional funding; future financing may not be available on acceptable terms.
- The Takeda collaboration provides at least $230 million in committed cash and equity consideration: $110 million upfront, $60 million in committed research and preclinical funding, and a $60 million equity investment. At June 30, $60.0 million was recorded as accounts receivable. Takeda may exercise program options; further option, milestone and royalty economics depend on specified events and are not assured.
- Pfizer may license programs after clinical-candidate selection. Pfizer had nominated all five permitted hepatic targets by April 2018. Wave recorded $2.8 million of Pfizer collaboration revenue for the first half and expects to recognize $10.7 million of allocated, unsatisfied consideration over the remaining research term, stated as 22 months at June 2018.
- Clinical and development expectations included top-line data from the two Huntington’s disease trials in the first half of 2019; DMD exon 51 Phase 1 safety data by the end of Q4 2018 and an interim dystrophin-expression readout in the second half of 2019; and expected initiation of C9ORF72 ALS/FTD trials in Q4 2018. These are forward-looking expectations, not outcomes.
- Key risks include clinical or preclinical failure, regulatory delays, safety issues, competition, intellectual-property challenges, dependence on external collaborators, and the need for additional capital. The company reported no material legal proceedings or off-balance-sheet arrangements. Management concluded disclosure controls were effective as of June 30, 2018.
- Wave stated it would cease to qualify as an emerging growth company on December 31, 2018 and expected higher compliance costs, including auditor attestation of internal controls in its 2018 annual report.
Important facts for investors to verify
- Whether Takeda’s $60.0 million receivable is collected as expected, and how research-funding reimbursements and collaboration expenses affect cash conversion.
- The assumptions and timing behind management’s at-least-12-month cash runway, given the $71.1 million first-half net loss and planned spending increases.
- Progress and reported data for the Huntington’s disease, DMD and C9ORF72 programs against the stated timelines.
- How much deferred collaboration revenue is recognized over time, and the timing and conditions for partner option exercises, milestones and royalties.
- The effects of share issuance, equity compensation and potential future financing on per-share value, as well as the additional costs and control requirements associated with the company’s 2018 filer-status transition.