Protalix BioTherapeutics, Inc. — Q1 2017 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Financial statement amounts below are in U.S. dollars unless otherwise noted. Protalix develops recombinant therapeutic proteins using its ProCellEx platform. Its pipeline includes PRX-102 for Fabry disease (Phase III), PRX-110 for cystic fibrosis (completed Phase II study), and OPRX-106 for ulcerative colitis (Phase II enrollment began in Q4 2016). Taliglucerase alfa is marketed by Pfizer outside Brazil; Protalix retains the Brazilian rights.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $2.889 million | $0.679 million |
| Cost of revenue | $2.088 million | $0.523 million |
| Gross profit / margin | $0.801 million / approximately 27.7% | $0.156 million / approximately 23.0% |
| Net R&D expense | $4.629 million | $6.025 million |
| SG&A expense | $2.537 million | $1.995 million |
| Operating loss | $6.365 million | $7.864 million |
| Net loss | $59.148 million | $8.598 million |
| Operating cash used | $8.426 million | $9.625 million |
| Cash and cash equivalents | $48.017 million at March 31 | $63.281 million at December 31, 2016 |
Revenue growth primarily reflected increased product sales in Brazil. Net R&D expense fell 23%, largely due to lower materials costs; SG&A rose 27%, primarily from higher sales and marketing expense. The gross margin figures above are calculated from reported revenue and gross profit.
The net loss included a $52.321 million non-cash loss from remeasurement of the embedded derivative in the 7.5% convertible notes, driven mainly by the increase in Protalix’s share price. Excluding this item, reported financial expenses, net were $52.783 million, versus $0.662 million in Q1 2016. Interest expense on convertible notes was $1.3 million, versus $0.776 million.
Cash declined by $15.264 million during the quarter. In addition to operating cash use, investing activities used $0.283 million and financing activities used $6.726 million, principally for cash payments related to note conversions. The company reported total assets of $71.852 million and total liabilities of $140.322 million at March 31, 2017, resulting in a capital deficiency of $68.470 million. The balance sheet reports $113.204 million of long-term convertible notes at quarter-end; note disclosures identify $14.9 million principal remaining on the 2013 notes and $55 million principal on the 2016 notes. During the quarter, $4.4 million principal of 7.5% notes was settled through shares and aggregate cash payments of $6.1 million.
Outlook, commentary, and risks
- Management believed existing cash and resources would fund planned development activities for at least 12 months, while warning that additional financing could be needed sooner if assumptions prove incorrect or spending increases. No future external funding commitments were in place.
- The Brazilian Ministry of Health order relayed by Fiocruz contemplated approximately $24.3 million of alf taliglucerase purchases in shipments beginning mid-2017 and continuing through year-end. The timing and fulfillment were uncertain. Fiocruz’s purchases had been significantly below agreed milestones, giving Protalix a termination right; discussions over compliance were ongoing.
- Protalix expected R&D to remain its primary expense, with significant planned spending on PRX-102, alidornase alfa, OPRX-106, and other candidates. Future funding needs depend on clinical progress, regulatory outcomes, commercialization in Brazil, and note conversions, among other factors.
- Key risks include clinical-trial delays or failure, regulatory approval uncertainty, dependence on Fiocruz and Pfizer supply arrangements, competition, and the ability to service, refinance, or satisfy convertible-note obligations. The filing specifically cited the risk of defeasing the remaining 4.5% notes by June 16, 2018.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
- Subsequent event: on May 10, 2017, the board amended the named executive officer bonus program to provide change-of-control cash bonuses, subject to conditions, of $1 million for the CEO and $400,000 for each other named executive officer.
Most important facts for investors to verify
- Whether the approximately $24.3 million Brazilian order converts into timely shipments, revenue, and cash receipts, and whether Fiocruz meets its contractual purchase obligations.
- Cash runway against planned clinical-development spending and any need, timing, and terms for additional financing.
- Convertible-note principal, carrying values, conversion terms, maturities, cash settlement requirements, and the potential for further derivative-related earnings volatility.
- Progress and results of the PRX-102, PRX-110, and OPRX-106 programs, including clinical and regulatory milestones.
- Protalix’s ability to meet drug-substance supply commitments to Pfizer and its commercial prospects for taliglucerase alfa in Brazil.