Protalix BioTherapeutics, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unless noted otherwise, amounts are U.S. dollars in millions; financial statement amounts are unaudited.
Business context
Protalix develops and commercializes recombinant therapeutic proteins using its ProCellEx plant-cell expression platform. Its marketed product, taliglucerase alfa, is sold as Uplyso in Brazil and certain Latin American markets and as Elelyso elsewhere. Key pipeline programs include PRX-102 for Fabry disease, PRX-110 for cystic fibrosis, and OPRX-106 for ulcerative colitis.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $7.526 | $4.670 | $16.773 | $7.118 |
| Gross profit | $1.460 | $0.422 | $3.096 | $0.672 |
| Gross margin | 19.4% | 9.0% | 18.5% | 9.4% |
| Net R&D expense | $6.389 | $5.056 | $19.844 | $18.900 |
| SG&A expense | $2.836 | $2.014 | $8.187 | $6.215 |
| Operating loss | $(7.765) | $(6.648) | $(24.935) | $(24.443) |
| Net loss | $(11.437) | $(7.290) | $(70.135) | $(26.741) |
| Loss per share, basic and diluted | $(0.09) | $(0.07) | $(0.55) | $(0.27) |
- Revenue growth reflected increased drug-substance sales to Pfizer and drug-product sales to Brazil. Cost of revenue rose with production volumes. R&D expense increased as pipeline programs advanced; management expects R&D to remain the company’s primary expense.
- Nine-month net financial expense was $45.2 million, including a $38.1 million noncash charge from remeasuring the embedded derivative in the 7.5% convertible notes. Q3 net financial expense was $3.7 million and included a $1.3 million debt-extinguishment loss.
- Cash and cash equivalents were $33.482 million at September 30, down from $63.281 million at December 31, 2016. Nine-month operating cash use was $27.584 million; investing cash use was $1.085 million; financing cash use was $1.419 million. Operating cash use exceeded the prior-year period’s $24.760 million.
- Current assets were $51.153 million and current liabilities $26.591 million, for working capital of approximately $24.6 million. Total liabilities were $87.129 million; convertible notes carried at $59.536 million in total ($5.911 million current and $53.625 million long term). Capital deficiency was $26.071 million.
Material changes, financing, and outlook
- For the nine months, revenue increased 136% year over year, while operating loss was broadly similar to the prior-year period. Net loss increased substantially, primarily because of the $38.1 million noncash derivative remeasurement charge.
- In July 2017, the company issued $10 million principal amount of 7.5% secured convertible notes due 2021 and exchanged $9 million principal amount of 4.5% notes due 2018 for $8.55 million of 4.5% notes due 2022. Noteholders also converted portions of outstanding notes during the period. The company reported $11.0 million of cash payments associated with certain 7.5% note conversions.
- Management stated that existing cash and resources were expected to fund planned development activities and expenditures for at least 12 months, while cautioning that assumptions could change and additional financing might be needed. The company had no commitments for future external funding.
- The Brazilian Ministry of Health issued a 2017 purchase order for approximately $24.3 million of alfataliglicerase, with shipments beginning in June. Fiocruz’s purchases to date were below agreed milestones; Protalix continued supply while discussing compliance and retained the right to terminate the agreement.
- In an October 17, 2017 subsequent event, Protalix licensed PRX-102 commercialization outside the United States to Chiesi. Terms include a $25 million upfront payment, up to $25 million toward development costs, up to $320 million in regulatory and commercial milestones, and tiered payments of 15%–35% of Chiesi net sales. Protalix retained U.S. commercialization rights.
- On October 18, 2017, holders converted the remaining $5 million face value of 4.5% notes due 2022 into 5,882,353 shares, with additional shares due for the make-whole premium. The filing also highlights risk around the 4.5% notes due 2018, including the company’s ability to defease the remaining notes by June 16, 2018.
Risks, contingencies, and other disclosures
Key risks include Fiocruz’s purchase performance and future negotiations with Brazil; dependence on Pfizer and other commercial partners; clinical, regulatory, manufacturing, and financing uncertainty; and the ability to meet, refinance, or otherwise satisfy convertible-note obligations. The company warned that inadequate financing could force it to delay, reduce, or discontinue programs or relinquish rights. It reported no material legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether the Brazilian purchase order translates into completed shipments, collections, and ongoing compliance with Fiocruz’s purchase obligations.
- Receipt and timing of Chiesi’s upfront and development-cost payments, and the conditions governing milestone and sales-based payments.
- Cash runway relative to clinical-trial spending, commercial obligations, and the availability and terms of any additional financing.
- Remaining debt principal, conversion activity, dilution, and the company’s plan for the 4.5% notes due 2018.
- Clinical and regulatory progress for PRX-102, PRX-110, and OPRX-106, including associated costs and any changes to development plans.