Protalix BioTherapeutics, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 16, 2017. This is an annual report, not a standalone fourth-quarter filing. Financial figures are in U.S. dollars unless stated otherwise.
Business context and reporting period
Protalix develops recombinant therapeutic proteins using its plant-cell ProCellEx platform. Taliglucerase alfa is its only approved product: Pfizer commercializes Elelyso outside Brazil, while Protalix retains Brazilian rights and supplies Uplyso to Fiocruz. Key development programs are PRX-102 for Fabry disease, alidornase alfa (PRX-110) for cystic fibrosis, and oral anti-TNF (OPRX-106) for ulcerative colitis.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $9.2 million | $4.4 million |
| Gross profit | $0.8 million | $3.6 million |
| Research and development, net of grants | $24.6 million | $20.0 million |
| Selling, general and administrative expenses | $9.4 million | $7.3 million |
| Loss from continuing operations | $29.2 million | $27.3 million |
| Net loss | $29.4 million | Net income of $58.0 million |
| Cash and cash equivalents at year-end | $63.3 million | $76.4 million |
- Revenue increased 111%, mainly from $4.8 million more in drug-substance sales to Pfizer. Cost of revenue rose to $8.4 million, largely reflecting those sales at cost; gross profit and gross margin consequently fell sharply.
- Research and development expense before grants was $30.4 million; $5.8 million of grants reduced the reported net expense. Management expects R&D to remain the primary expense.
- Operating cash use was $32.1 million, versus $24.3 million in 2015. Investing activities used $1.0 million and financing provided $19.7 million, principally from the new convertible-note placement. Cash declined by $13.1 million.
- At year-end, current assets were $71.9 million and current liabilities $66.2 million, implying working capital of approximately $5.7 million. Shareholders’ equity was negative $10.0 million.
- Balance-sheet convertible notes totaled approximately $73.2 million ($53.9 million current and $19.3 million long-term); a $4.3 million promissory note was also outstanding. Contractual obligations tabled for convertible notes total $102.2 million, including scheduled amounts; investors should review the debt notes for terms and timing.
Material changes versus prior period
- Revenue rose, but the increase was largely low-margin supply revenue to Pfizer. R&D and SG&A also increased.
- Net income of $58.0 million in 2015 included a $39.9 million disposal gain and $45.4 million of income from discontinued operations associated with the Pfizer transaction. In 2016, discontinued operations recorded a $0.2 million loss; the company therefore returned to a net loss.
- In December 2016, Protalix exchanged $54.1 million principal of 4.5% notes for $40.2 million of 7.5% notes, 23.8 million common shares, and cash for accrued interest and fractional shares. The exchange generated a reported $14.1 million gain on extinguishment. Protalix also issued $22.5 million principal of new 7.5% notes, receiving net proceeds of $19.7 million.
- Common shares outstanding increased from 99.8 million at year-end 2015 to 124.1 million at year-end 2016. The exchange and financing increased dilution and changed the debt profile.
Outlook, commentary, risks and unusual items
- Management said available cash was expected to fund planned operations for at least 12 months, while warning that assumptions could change and additional financing may be needed. No earnings or revenue guidance was provided.
- Fiocruz reported a Brazilian Ministry of Health order for approximately $24.3 million of Uplyso shipments during 2017, expected to begin midyear. This is a stated purchase order, not assured realized revenue. Historical Fiocruz purchases were below contractual milestones, giving Protalix a termination right; the company was continuing supply while discussing next steps.
- PRX-102 Phase III enrollment began in October 2016. The company planned an interim non-inferiority analysis at 12 months and a superiority analysis after 24 months; it also expected to enroll 22 patients in the supportive BRIDGE study during 2017.
- In January 2017, after year-end, Protalix reported positive interim Phase IIa results for alidornase alfa in the first 13 cystic-fibrosis patients. These interim findings are preliminary and are not evidence of final trial results. OPRX-106’s Phase IIa ulcerative-colitis study began enrolling in November 2016.
- The 7.5% notes are secured by liens on material assets, including intellectual property, and guaranteed by subsidiaries. Conversion and interest settlement in shares are restricted pending required stockholder approval; absent approval, some obligations may require cash settlement. Failure to refinance or defease the remaining 4.5% notes by June 16, 2018 could accelerate the 7.5% notes’ maturity to June 15, 2018.
- Other significant risks include clinical-trial and regulatory uncertainty, reliance on Pfizer and Fiocruz, manufacturing and supplier dependence, competition, potential dilution, and Israeli currency, political and government-grant restrictions. The filing reports no material legal proceedings and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether Fiocruz’s approximately $24.3 million 2017 order was fulfilled on schedule and translated into collected revenue, and whether purchase-milestone issues were resolved.
- Cash burn, working-capital needs, and the assumptions supporting management’s stated 12-month runway.
- Convertible-note balances, covenants, collateral, cash-payment exposure, required stockholder approvals, and the 2018 maturity-acceleration condition.
- Final clinical data, enrollment and timelines for PRX-102, alidornase alfa, and OPRX-106; distinguish interim findings from completed trial results.
- The economics of Pfizer supply sales and the distinction between continuing and discontinued operations, especially when comparing 2016 with 2015’s transaction-related gains.
- The filing’s audited financial statements and note disclosures for debt, contingent obligations, and the revenue-recognition treatment of the Brazilian order.