Altimmune, Inc. annual report, FY2012

Altimmune, Inc. — Filing identity and reporting period

Important identification: The supplied filing is PharmAthene, Inc.’s Form 10-K for the fiscal year ended December 31, 2012, filed March 13, 2013. It does not identify Altimmune, Inc. as the registrant. The summary below reflects PharmAthene’s filing.

PharmAthene was a development-stage biodefense company. Its principal candidates were SparVax, an anthrax vaccine; rBChE, a nerve-agent countermeasure; and Valortim, an anthrax antibody. It had not commercialized a product or reported product-sale revenue; substantially all revenue came from U.S. government development contracts and grants.

Financial performance and liquidity

FY 2012 revenue increased 3.7%. SparVax generated $22.9 million, rBChE-AES $1.8 million, and Valortim $0.5 million. No gross margin is reported in the supplied filing text. The annual net loss increased despite a narrower operating loss, in part because FY 2011 included substantially larger gains from changes in the fair value of derivative instruments.

FY 2012 investing activities provided $0.07 million and financing activities provided $3.72 million, principally from GE Capital borrowings. Year-end debt included a $2.5 million term loan and $1.33 million drawn on the revolving line. The term loan bears fixed interest of 10.14%; the revolving rate was 6.5% at year-end. The facility is secured by substantially all company assets, subject to stated exceptions, and matures in September 2015.

For the fourth quarter of 2012, revenue was $6.01 million, operating loss was $1.43 million, and net loss was $1.27 million. In the fourth quarter of 2011, revenue was $6.24 million, operating loss was $1.08 million, and net income was $0.75 million.

Material changes versus the prior period

• Revenue rose by $0.91 million year over year, mainly from a $3.6 million increase in SparVax revenue; this was partly offset by a $3.2 million reduction in Valortim revenue as its NIAID contract ended in early 2012.
• Operating expenses declined by $4.55 million, including lower R&D and G&A expenses. G&A fell largely because of lower legal and professional costs and reduced headcount.
• Operating loss narrowed by $5.46 million. Net loss nevertheless increased by $1.12 million as total other income declined from $7.93 million to $1.54 million, and 2012 included approximately $0.20 million of income tax expense.
• Operating cash use decreased by $5.49 million; cash increased by $1.46 million during 2012, supported by new debt financing.
• Working capital and equity declined year over year. Total liabilities increased, including newly recorded current and long-term debt.

Outlook, risks, contingencies, and unusual items

• SparVax clinical hold: The FDA placed the program on clinical hold in August 2012 before planned patient dosing, requesting additional stability data and information about stability-indicating assays. The company could not say when or whether the hold would be lifted or the Phase II trial could begin. Approximately $28 million remained available under BARDA base funding and approximately $17 million in unfunded options remained, but future funding was uncertain.
• Liquidity outlook: Management expected cash, available borrowing capacity, and collections on existing contracts to fund operations and capital needs through at least December 31, 2013. This depended on contract funding and collections; management warned additional capital might be required and operations could need to be curtailed. Approximately $1.6 million was described as additionally available on the GE revolving line in the liquidity discussion.
• Government dependence and budget risk: Revenue depended overwhelmingly on U.S. government contracts. The filing cited appropriations uncertainty, the continuing resolution, sequestration and potential reductions or delays in biodefense spending. BARDA’s SparVax contract had an extension through February 2014; DoD exercised a $2.5 million rBChE-AES option for 2013. Valortim had no new government funding awarded.
• SIGA litigation: A Delaware court awarded PharmAthene 50% of defined net profits from Arestvyr and related products for 10 years after SIGA earns its first $40 million in net profits. SIGA appealed and PharmAthene cross-appealed; the Delaware Supreme Court heard argument in January 2013. The outcome, sales, profitability, and timing of any proceeds were uncertain. PharmAthene had not recorded an amount due from SIGA.
• Other contingencies: A vendor sued PharmAthene over alleged insurance deficiencies after mishandling biological-material storage; PharmAthene filed a separate suit seeking damages. PharmAthene said it would defend the vendor’s claims and pursue its own. A potential $5 million payment to Avecia could be triggered by a qualifying substitute or replacement for a specified BARDA solicitation; the original solicitation was cancelled.
• Unusual noncash and one-time items: 2012 other income included a $1.23 million gain from realizing cumulative currency translation adjustments upon liquidation of the Canadian subsidiary and a $0.59 million derivative fair-value gain. The derivative gain was noncash and based on Level 3 valuation inputs. FY 2011 included a $7.14 million derivative gain and a $0.78 million gain on sale of Canadian assets.
• Development and operating risks: Product candidates required further animal studies, clinical work, manufacturing development and regulatory review. PharmAthene relied on third-party manufacturers and research organizations, had no internal manufacturing facilities, and faced competition, potential dilution, and uncertainty over regulatory approval and commercialization.
• Reporting and controls: Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at year-end.

Important facts for investors to verify

1. Confirm the issuer and filing period: this document is PharmAthene’s 2012 Form 10-K, not an Altimmune filing.
2. Check subsequent FDA and BARDA developments concerning the SparVax clinical hold, remaining contract funding, and any Phase II restart.
3. Review cash use, receivable collections, revolving-credit availability, debt covenants, and whether the stated runway through 2013 was achieved.
4. Verify the Delaware Supreme Court outcome and SIGA’s Arestvyr delivery, profit recognition, and any resulting payments to PharmAthene.
5. Assess the impact of federal biodefense appropriations and sequestration on PharmAthene’s contract pipeline and expected revenue.
6. Review the status and potential financial exposure of the vendor dispute and the conditional $5 million Avecia payment.
7. Consider dilution from outstanding options and warrants; the filing reported 6.23 million options and 5.62 million warrants outstanding at December 31, 2012.