ASSEMBLY BIOSCIENCES, INC. annual report, FY2017

Assembly Biosciences, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; filed March 7, 2018. The company is a clinical-stage biotechnology business with HBV and microbiome programs and no approved products or product-sale revenue.

Financial performance and position

Metric	2017	2016
Collaboration revenue	$9.0 million	None
Operating expenses	$61.2 million	$45.3 million
Operating loss	$52.2 million	$45.3 million
Net loss	$42.8 million	$44.3 million
Net loss per share, basic and diluted	$2.41	$2.57
Research and development expense	$44.2 million	$33.1 million
General and administrative expense	$17.0 million	$12.2 million

Collaboration revenue came from Allergan: approximately $4.4 million of upfront-payment amortization and $4.6 million of reimbursed costs. The $50 million upfront payment is primarily recorded as deferred revenue and recognized over the estimated service period.
R&D costs excluding stock-based compensation rose approximately $8.7 million: HBV spending increased about $3.2 million and microbiome spending about $5.6 million. Total R&D expense includes $5.4 million of stock-based compensation. G&A expense included $3.2 million of stock-based compensation.
The net loss included a $9.1 million income tax benefit, largely a non-cash benefit from the 2017 Tax Act. The filing reports an $8.6 million Tax Act-related benefit; this reduced the reported loss and is not operating revenue.
At year-end, cash and cash equivalents were $82.0 million and marketable securities were $41.3 million. Current assets were $123.1 million versus current liabilities of $13.5 million, implying working capital of about $109.6 million. Total assets were $169.3 million and stockholders’ equity was $113.1 million.
No interest-bearing debt is identified in the supplied filing text. Total liabilities of $56.2 million included $45.8 million of deferred revenue and $2.1 million of deferred tax liabilities.
Operating cash flow was positive $1.9 million, compared with cash used of $34.9 million in 2016. The 2017 inflow primarily reflected a $45.8 million increase in deferred revenue under the Allergan collaboration; it should not be read as evidence of positive operating economics. Investing cash flow was negative $15.6 million; financing cash flow was positive $67.2 million, including $64.8 million net proceeds from a public offering.
For the fourth quarter of 2017, collaboration revenue was $3.3 million, operating expenses $15.6 million, and net loss $3.0 million, or $0.16 per share. The filing does not provide a clear quarterly cash-flow figure.
There is no meaningful product gross margin disclosed because the company had no product sales. Management said available cash, cash equivalents and marketable securities were expected to fund operations for at least 12 months, while also stating substantial additional funding would be needed over time.

Material changes and business developments

Allergan paid a $50 million upfront amount in February 2017 for an exclusive worldwide license to selected microbiome programs. Assembly may receive up to approximately $630 million in development milestones, $2.15 billion in commercial milestones, and tiered royalties; these amounts are contingent and are not assured revenue.
Through proof-of-concept studies, the parties share development costs up to $75 million, with Assembly responsible for one-third and Allergan two-thirds; Allergan assumes post-proof-of-concept development costs. Assembly recorded approximately $2.4 million of its share of 2017 costs.
ABI-H0731 completed Phase 1a in healthy volunteers and entered Phase 1b in patients with chronic HBV. The company reported it was well tolerated in the Phase 1a study of 48 volunteers; headaches and rashes were among the mild, transient drug-related events reported at the highest doses.
Assembly selected ABI-H2158 as its second HBV candidate in Q4 2017; it was in IND-enabling studies. The company elected not to initiate a Phase 1b trial of microbiome candidate ABI-M101 and instead prioritized ABI-M201 for ulcerative colitis and ABI-M301 for Crohn’s disease.
R&D expense rose from $33.1 million to $44.2 million, while net loss narrowed modestly, mainly because of collaboration revenue and the tax benefit despite higher operating costs.

Outlook, risks and contingencies

At the time of filing, management expected ABI-H0731 Phase 1b interim and full results in the first half of 2018; subject to successful results, it planned Phase 2 combination trials in mid-2018 and anticipated a larger Phase 2b trial in 2019. ABI-H2158 could enter Phase 1a in the second half of 2018, subject to completion of enabling studies. These are forward-looking plans, not guaranteed outcomes.
The company expects significant losses and rising R&D costs. It has no product revenue, is dependent on future development and regulatory success, and may need additional financing. Equity financing could dilute shareholders; collaboration or licensing financing could require granting rights on unfavorable terms.
Key risks include clinical failure or delays, uncertain translation of preclinical findings and biomarkers into patient benefit, regulatory hurdles, patient enrollment and manufacturing constraints, competition, patent and license risks, and dependence on Allergan and other third parties. Allergan may terminate its agreement for convenience with advance notice.
Potential license obligations include up to $825,000 in IURTC development milestones; no such performance milestones had been paid by year-end, and the company anticipated the first payment in 2018. Additional contingent milestone and royalty obligations exist under the Therabiome license.
Contractual obligations totaled approximately $9.5 million, including $5.6 million of lease payments, $3.3 million of R&D and purchase commitments, and $0.6 million of license obligations. The table excludes Assembly’s potential share of up to $25 million of future Allergan collaboration costs and certain contingent milestones and royalties.
The filing reported no material legal proceedings. Management and the auditor concluded financial reporting controls were effective; Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.

Important facts for investors to verify

Current cash, marketable securities, spending rate and the assumptions behind management’s “at least 12 months” funding estimate.
ABI-H0731 Phase 1b final results and subsequent trial timing; distinguish company targets from achieved milestones.
Progress, funding responsibilities and termination rights under the Allergan collaboration, and the timing and conditions for any milestone or royalty receipts.
Whether ABI-H2158 advances from IND-enabling work and whether microbiome priorities lead to IND-supporting studies.
Effects of future share issuance, equity compensation and contingent financing needs on dilution; the filing reported 20,137,974 shares outstanding at year-end and 20,251,312 as of March 5, 2018.
Availability and limitations of tax attributes: reported federal and state NOL carryforwards were approximately $153.2 million and $165.0 million, respectively, and use may be restricted by ownership-change rules.