Aclaris Therapeutics, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed March 12, 2018. Aclaris is a dermatologist-led biopharmaceutical company developing and commercializing dermatology and immunology therapies. Its lead product, ESKATA (hydrogen peroxide) topical solution 40%, received FDA approval in December 2017 for raised seborrheic keratosis. The company expected a U.S. launch in the second quarter of 2018.
The company operated two segments: dermatology therapeutics and contract research. All reported revenue came from laboratory services and NIH grants through Confluence Life Sciences, acquired in August 2017; the dermatology therapeutics segment had not generated revenue.
Financial performance and key metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $1.683 million | $0 | +$1.683 million |
| Gross profit | $0.476 million | $0 | +$0.476 million |
| Gross margin | 28.3% | Not applicable | New revenue stream |
| Research and development | $39.790 million | $33.476 million | +$6.314 million |
| General and administrative | $33.109 million | $15.091 million | +$18.018 million |
| Loss from operations | $(72.423) million | $(48.567) million | $(23.856) million |
| Net loss | $(68.523) million | $(48.079) million | $(20.444) million |
| Basic and diluted loss per share | $(2.44) | $(2.25) | $(0.19) |
| Cash used in operating activities | $(54.663) million | $(34.603) million | $(20.060) million |
Cash, cash equivalents and marketable securities totaled $208.854 million at December 31, 2017, including $20.202 million of cash and cash equivalents and $188.652 million of marketable securities. Working capital was $187.459 million, compared with $132.333 million at year-end 2016. Total liabilities were $18.247 million, including $4.378 million of acquisition-related contingent consideration; the filing does not identify material conventional debt or credit facilities.
Net cash provided by financing activities was $100.386 million, primarily from $19.311 million of net at-the-market offering proceeds and $80.918 million from the August 2017 public offering. Net cash used in investing activities was $55.692 million, including $9.647 million for the cash portion of the Confluence acquisition and $1.235 million for property and equipment. Stock-based compensation was $14.430 million, up from $6.104 million in 2016.
Material changes versus the prior comparable period
- Revenue began in 2017 following the Confluence acquisition, but the company continued to have no product revenue from ESKATA or other dermatology products.
- Research and development expense increased 18.9%, driven by Phase 2 A-101 trials, JAK inhibitor development, increased personnel, stock-based compensation and medical affairs activities. ESKATA development costs declined after completion of Phase 3 trials in 2016.
- General and administrative expense increased 119.4%, primarily due to ESKATA pre-commercial launch activities, higher headcount, stock-based compensation, facilities costs and acquisition-related expenses.
- Net loss increased 42.5% and operating cash burn increased 58.0%, reflecting expanded development and commercialization preparation.
- Confluence added discovery and preclinical capabilities, several preclinical candidates and a contract research business. The acquisition consideration had a fair value of $24.322 million, including $10.269 million cash, $9.675 million of stock and $4.378 million of contingent consideration, plus potential future milestone payments of up to $80 million.
- Shares outstanding increased to 30.856 million at December 31, 2017 from 26.059 million at December 31, 2016, reflecting equity financing and acquisition consideration.
Guidance, outlook, commentary and risks
- Management expected continued net losses for several years as it commercialized ESKATA, advanced A-101 45% Topical Solution for common warts, developed ATI-501 and ATI-502, and expanded its pipeline.
- Based on current assumptions, management believed available cash, cash equivalents and marketable securities would fund operations for more than 12 months from the filing date. Additional capital was expected to be needed for A-101 development and commercialization, future pipeline investments and other strategic activities.
- A-101 Phase 2 trials reported positive top-line results in January 2018. The company expected to initiate Phase 3 trials in the second half of 2018, report data in the second half of 2019 and, if positive, submit an NDA.
- Key commercial uncertainty for ESKATA is that third-party payors generally were not expected to reimburse treatment of seborrheic keratosis; commercial success therefore depended substantially on patient out-of-pocket willingness and physician adoption.
- The company relied on third parties for manufacturing, supply, clinical research, storage and distribution. It had no manufacturing facilities and no redundant supply source for ESKATA components, creating potential supply, quality, cost and timing risks.
- ESKATA’s FDA-recognized exclusivity was three years through December 14, 2020, rather than the five-year NCE exclusivity sought by the company. The company was reviewing its options, but no favorable change was assured.
- Material contingent obligations included potential Rigel milestones of up to $90 million, Vixen-related milestones of up to $40.5 million, Columbia milestones of up to $11.6 million, and Confluence milestone consideration of up to $80 million, in addition to royalties and other contingent payments.
- The 2017 tax benefit of $1.830 million primarily reflected the Tax Cuts and Jobs Act’s revaluation of deferred tax balances and did not indicate recurring profitability. The company maintained a full valuation allowance against deferred tax assets.
- Principal risks included clinical and regulatory failure, delayed or unsuccessful commercialization, limited reimbursement, competition, patent challenges, third-party manufacturing dependence, need for additional financing and potential dilution.
Important facts for investors to verify
- Actual U.S. launch timing, initial ESKATA demand, pricing, physician adoption and patient out-of-pocket willingness to pay.
- Whether ESKATA generates meaningful product revenue and whether the company obtains or maintains broader exclusivity or patent-term extension.
- A-101 Phase 3 initiation, enrollment, results and timing of any NDA submission.
- Clinical progress and safety data for ATI-501, ATI-502 and Confluence-derived candidates.
- Quarterly cash burn, remaining marketable securities, financing needs and any subsequent equity or debt issuance.
- Changes in the fair value and payment likelihood of contingent consideration and milestone obligations.
- Manufacturing readiness, supply continuity and regulatory compliance of third-party suppliers.
- Integration and operating performance of Confluence’s contract research business, including customer concentration; the top five customers represented 70% of laboratory service revenue earned after acquisition.