Palatin Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the three months ended September 30, 2017, Palatin’s fiscal first quarter of fiscal 2018. Palatin is a clinical-stage biopharmaceutical company developing peptide therapeutics. Its lead candidate, bremelanotide for hypoactive sexual desire disorder (HSDD), is licensed to AMAG for North America and to Fosun for mainland China, Taiwan, Hong Kong and Macau.
Financial performance and position
| Metric | Quarter ended September 30, 2017 | Prior-year quarter |
|---|---|---|
| License and contract revenue | $26.94 million | $0 |
| Research and development expense | $14.16 million | $11.23 million |
| General and administrative expense | $1.54 million | $1.21 million |
| Operating income (loss) | $11.23 million | $(12.44) million |
| Net income (loss) | $10.60 million; $0.05 per share, basic and diluted | $(13.05) million; $(0.08) per share |
| Cash from (used in) operating activities | $1.43 million | $(6.60) million |
- Quarter-end cash and cash equivalents were $39.71 million; available-for-sale investments were $0.25 million and accounts receivable were $9.39 million. Together these totaled $49.35 million.
- Total assets were $50.54 million and total liabilities were $44.56 million. Current liabilities were $39.44 million, including $20.16 million of deferred revenue; excluding deferred revenue, current liabilities were $19.28 million.
- Notes payable had a carrying value of $12.16 million ($7.86 million current and $4.31 million long-term). Palatin paid $2.00 million of principal in the quarter. The venture loans bear interest at one-month LIBOR plus 8.50%; the company reported covenant compliance.
- Operating margin and earnings were substantially affected by license revenue; the filing reports no product-sales revenue, so commercial product margins are not applicable. Operating cash flow also reflected collaboration-related receipts and working-capital movements.
Material changes versus the prior comparable period
- Revenue rose from zero to $26.94 million: $21.94 million was recognized under the AMAG agreement and $5.00 million under the Fosun agreement. The Fosun upfront payment was received in October 2017; $4.50 million was reported as a September 30 receivable, with $0.50 million withheld for Chinese taxes.
- Net income turned positive from a prior-year loss, principally because of license revenue. R&D expense increased about $2.94 million, primarily due to continued bremelanotide development; G&A expense also increased.
- Cash from operations improved from a $6.60 million use to $1.43 million provided. Cash declined by $0.49 million during the quarter, to $39.71 million, while $2.00 million of debt principal was repaid.
- Common shares outstanding on the balance sheet increased from 160.52 million at June 30 to 184.39 million at September 30. Warrant exercises and cashless exercises contributed to share issuance; weighted-average basic shares were 197.11 million, versus 165.85 million a year earlier.
Outlook, management commentary and risks
- Management said existing capital resources were expected to fund planned operations through at least calendar 2018. It also expects future losses and says additional funding will be needed for other candidates’ clinical trials and, if successful, regulatory submissions. Additional financing may not be available on acceptable terms or at all.
- Planned spending includes bremelanotide ancillary studies and NDA preparation, plus development of PL-3994 and melanocortin programs. At the time of the filing, management expected to file an IND for PL-8177 in calendar 2017, start PL-3994 Phase 2A trials later that year, complete PL-8331 IND-enabling work later that year, and potentially file an IND for PL-5028 in the first half of 2018. These were expectations, not guarantees.
- The AMAG agreement provides for up to $25 million of reimbursement of specified development costs, up to $80 million in regulatory milestones, up to $300 million in sales milestones and tiered royalties. The Fosun agreement includes a $7.5 million payment upon qualifying Chinese regulatory approval and up to $92.5 million in sales milestones, plus royalties. These contingent amounts are not guaranteed.
- Key risks include clinical and regulatory uncertainty, development and manufacturing costs, reliance on licensees and contractors, the need for additional capital, and the possibility that candidates may never be approved or commercialized. Palatin disclosed no material changes to its previously reported risk factors, no current legal proceedings, and no off-balance-sheet arrangements.
- The quarter’s profit should not be treated as evidence of ongoing profitability: revenue arose from licensing arrangements, while management anticipates continued development spending and losses. The company reported effective disclosure controls as of September 30, 2017.
Important facts for investors to verify
- How AMAG development reimbursements, remaining deferred revenue and future revenue recognition are expected to develop.
- Whether the Fosun upfront payment was collected as disclosed and the conditions and timing for milestone payments and royalties.
- Updated cash runway, spending needs and financing plans beyond management’s estimate of funding through calendar 2018.
- Progress toward bremelanotide regulatory submission and the stated timelines for PL-8177, PL-3994, PL-8331 and PL-5028.
- Potential dilution from outstanding warrants, options and restricted stock units, including the increase in shares outstanding after quarter-end.