Aclaris Therapeutics, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2020, compared with the same period in 2019. Aclaris is a physician-led biopharmaceutical company focused on immuno-inflammatory diseases, with contract research services conducted through Confluence. Following its September 2019 strategic review, the company refocused on development programs and is pursuing partners for certain drug candidates and ESKATA, its non-marketed FDA-approved product. Commercial products were presented as discontinued operations.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1.407 million | $1.263 million | +$0.144 million |
| Contract research revenue | $1.189 million | $1.263 million | -$0.074 million |
| Other revenue | $0.218 million | — | +$0.218 million |
| Research and development expense | $9.444 million | $19.643 million | -$10.199 million |
| General and administrative expense | $6.200 million | $7.464 million | -$1.264 million |
| Loss from operations | $(15.506) million | $(27.051) million | Improved $11.545 million |
| Net loss | $(15.586) million | $(37.565) million | Improved $21.979 million |
| Net loss per share | $(0.37) | $(0.91) | Improved $0.54 |
| Cash used in operating activities | $(6.805) million | $(31.318) million | Improved $24.513 million |
Cost of revenue was $1.269 million versus $1.207 million. The implied gross margin was approximately 10%, although management stated that gross profit is not a meaningful profitability measure for the contract research business. Cash, cash equivalents and restricted cash were $53.992 million at March 31, 2020, and marketable securities were $25.013 million, for total cash and marketable securities of $79.005 million. The accumulated deficit was $469.113 million.
Total liabilities were $38.637 million, including $10.573 million of long-term debt and $3.435 million of contingent consideration. In March 2020, Aclaris borrowed $11.0 million under a Silicon Valley Bank term loan and issued a warrant for up to 460,251 common shares with an initial exercise price of $0.956 per share. The loan bears interest at the greater of prime plus 2% or 6.75%, requires interest-only payments through March 2022, and matures in March 2024.
Material changes versus the prior comparable period
- Revenue increased modestly because $0.218 million of royalty income from RHOFADE partially offset lower contract research revenue.
- Research and development expense fell 52%, primarily because 2019 included higher spending on A-101, other JAK inhibitors and earlier-stage activities; restructuring and lower headcount also reduced costs.
- General and administrative expense declined 17%, principally due to lower personnel costs.
- Net loss from discontinued operations declined to $0.258 million from $10.284 million. Discontinued product sales were zero in Q1 2020 versus $3.778 million in Q1 2019.
- Operating cash burn improved substantially, partly due to receipt of $5.241 million from Allergan related to post-sale RHOFADE receipts; the amount was payable to EPI Health and included in accrued expenses.
- Contingent consideration increased by $1.767 million following the successful completion of the ATI-450 Phase 1 trial and updated milestone assumptions.
Guidance, outlook, risks and unusual items
Management expects continued operating losses and significant research and development spending. Aclaris expects to continue ATI-450 clinical development, develop preclinical compounds, and support discovery activities. It expected to submit an IND for ATI-1777 in mid-2020 and an IND for ATI-2138 in the fourth quarter of 2020 or first quarter of 2021, subject to development progress and regulatory acceptance. The filing does not provide quantitative revenue or earnings guidance.
The Phase 2a ATI-450 trial was temporarily paused because of COVID-19; enrollment was expected to resume at one site, with additional sites determined as conditions evolved. Management warned that data reporting could be delayed. COVID-19 may also disrupt clinical sites, suppliers, contract research organizations, manufacturing, regulatory activities, operations and access to capital.
Management stated that existing cash, cash equivalents and marketable securities were expected to fund operating and capital requirements for more than 12 months from issuance of the financial statements, while also acknowledging the need for additional capital. Potential sources include equity or debt financing, partnerships, reduced research spending and further restructuring. Failure to raise capital or generate partner revenue could require substantial reductions in planned operations.
Material contingencies include up to $75.0 million of remaining Confluence milestone payments, up to $76.0 million of remaining Rigel development milestone payments plus an additional potential $10.5 million, and other milestone, royalty and licensing obligations. The company is also defending a consolidated securities class action and a consolidated derivative action relating principally to disclosures concerning ESKATA; the filing does not provide a clear potential loss amount.
Most important facts for investors to verify
- Whether the $79.005 million of cash, cash equivalents, restricted cash and marketable securities remains sufficient as clinical spending and debt service increase.
- The timing, enrollment progress and clinical results of the ATI-450 Phase 2a program, including the effect of COVID-19 delays.
- Availability and terms of future financing, partnership transactions or additional restructuring.
- Compliance with the SVB loan covenants and the ability to service or refinance the debt through its March 2024 maturity.
- Potential cash obligations from Confluence, Rigel and other milestone and royalty arrangements.
- Developments and possible financial exposure in the ESKATA-related securities and derivative litigation.
- Whether royalty income from RHOFADE or other partner transactions can provide recurring funding, since product sales were discontinued and no quantitative partner revenue outlook was provided.