Protalix Biotherapeutics, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited consolidated results. Unless noted otherwise, financial amounts below are in U.S. dollars millions. Protalix develops and commercializes recombinant therapeutic proteins using its ProCellEx platform. Its marketed taliglucerase alfa is sold through Pfizer outside Brazil and by Protalix in Brazil; its pipeline includes PRX-102 for Fabry disease, PRX-110 for cystic fibrosis, and OPRX-106 for ulcerative colitis.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $2.006 | $6.358 | $6.559 | $9.247 |
| Gross profit (loss) | $(0.177) | $0.835 | $1.452 | $1.636 |
| Research and development, net of grants | $7.241 | $8.826 | $13.684 | $13.455 |
| Selling, general and administrative | $2.158 | $2.814 | $4.656 | $5.351 |
| Operating loss | $(9.576) | $(10.805) | $(16.888) | $(17.170) |
| Net income (loss) | $(11.294) | $0.450 | $(20.694) | $(58.698) |
| Basic loss per share | $(0.08) | $0.00 | $(0.14) | $(0.47) |
Q2 gross margin was approximately negative 8.8%, versus positive 13.1% in Q2 2017; first-half gross margin was approximately 22.1%, versus 17.7%. Revenue fell 68% in Q2 and 29% in the first half, primarily due to lower sales of drug substance to Pfizer and drug product to Brazil. Q2 cost of revenue also fell, but less than revenue, resulting in a quarterly gross loss. First-half R&D net of grants rose slightly year over year, while SG&A declined.
Net financial expense was $1.718 million in Q2 2018 and $3.806 million in the first half. Comparisons with 2017 are affected by fair-value remeasurement of the convertible-note embedded derivative: 2017 included $14.260 million of Q2 financial income from the remeasurement and a $38.061 million first-half charge. These items materially influenced prior-period net results.
Cash, liquidity, and debt
- Cash and cash equivalents were $28.327 million at June 30, 2018, down from $51.163 million at December 31, 2017. Current assets were $43.052 million and current liabilities $15.072 million.
- First-half operating cash use was $17.377 million; investing cash use was $0.447 million and financing cash use was $4.752 million. Cash decreased by $22.836 million during the period.
- At June 30, the company reported $46.742 million of long-term convertible-note liabilities. It also disclosed $58.1 million aggregate principal outstanding on its 7.50% secured convertible notes due 2021, with an estimated fair value of $61.4 million. The 2013 notes due 2018 were effectively discharged in June through an exchange, cash payments, and funding under the indenture.
- Management believed existing cash resources and commitments would fund planned development activities for at least 12 months from approval of the June 30 financial statements, while cautioning that additional funding could be needed sooner if assumptions change or expenses rise.
Material developments, outlook, and risks
- On July 23, 2018, after quarter-end, Protalix granted Chiesi exclusive U.S. PRX-102 commercialization rights, complementing Chiesi’s existing ex-U.S. license. The agreement provides for a $25 million upfront payment, up to $20 million for development costs, up to $760 million in potential regulatory and commercial milestones, and tiered supply payments of 15%–40% of net sales. These are contractual terms and potential payments, not guaranteed proceeds. The earlier ex-U.S. agreement included a $25 million upfront payment and up to $320 million in potential milestones. The filing states that the upfront and specified development payments under the ex-U.S. agreement are deferred until commercial manufacturing begins; the U.S. agreement’s accounting treatment is not detailed here.
- PRX-102 was in a Phase III trial for Fabry disease; it had received U.S. Fast Track designation and EU orphan drug designation. The company expected R&D to remain its primary expense. PRX-110 had completed a Phase IIa study, and the company reported Phase II data releases for OPRX-106.
- Fiocruz’s purchases under the Brazil supply and technology-transfer agreement remained significantly below certain purchase milestones. Protalix retained the right to terminate the agreement but said it was continuing supply and discussing compliance options. The company recorded $2.6 million of Brazil sales in the first half from a 2017 Brazilian Ministry of Health purchase order of approximately $24.3 million.
- Other key risks include clinical and regulatory uncertainty, reliance on partners and third-party suppliers, potential financing needs, and the ability to meet Pfizer supply commitments. The filing reported no material change to previously disclosed risk factors, no material legal proceedings, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Pfizer and Brazil shipment volumes recover, and how the timing of customer orders affects revenue and gross margins.
- Actual cash burn, the assumptions behind management’s at-least-12-month runway estimate, and whether further financing is needed.
- PRX-102 trial progress and the conditions, timing, and accounting for Chiesi upfront, development, milestone, and product-supply payments.
- Fiocruz’s progress toward its purchase obligations and any decision to continue, amend, or terminate the Brazil agreement.
- The terms, repayment or conversion outlook, and potential dilution associated with the remaining 2021 convertible notes.