Aclaris Therapeutics, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Aclaris is a physician-led biopharmaceutical company focused on immuno-inflammatory and dermatological diseases. The filing covers the quarter and six months ended June 30, 2019; financial statements are unaudited. The company marketed RHOFADE for rosacea and ESKATA for seborrheic keratosis, operated a contract research business through Confluence, and advanced several clinical and preclinical programs.
Financial performance and position
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $5.9 million | $3.7 million | $10.9 million | $4.8 million |
| Product sales | $5.0 million | $1.5 million | $8.8 million | $1.5 million |
| Contract research revenue | $0.9 million | $1.1 million | $2.1 million | $2.3 million |
| Operating loss | $(49.8) million | $(32.0) million | $(87.1) million | $(62.9) million |
| Net loss | $(49.9) million | $(31.2) million | $(87.4) million | $(61.4) million |
| Basic and diluted loss per share | $(1.21) | $(1.01) | $(2.12) | $(1.99) |
| Net cash used in operating activities | Not separately reported for the quarter | $(52.7) million | $(43.7) million |
RHOFADE generated $4.7 million and $8.4 million of net sales in the quarter and six-month period, respectively. ESKATA generated $0.3 million and $0.3 million in those periods. The filing does not present a consolidated gross profit or gross margin because management considers the mix of product sales and contract research services to make gross profit less meaningful.
At June 30, 2019, cash and cash equivalents were $31.7 million and marketable securities were $83.9 million, for combined cash, cash equivalents and marketable securities of $115.5 million. Accounts receivable were $19.4 million, including $18.5 million related to RHOFADE sales distributed by Allergan. Total assets were $217.2 million, total liabilities were $80.0 million, and stockholders’ equity was $137.2 million. The accumulated deficit was $379.6 million.
Debt consisted primarily of approximately $30.0 million outstanding under the Oxford term loan facility, with a carrying value of $29.9 million. The facility bears interest at the greater of 8.35% or 30-day U.S. LIBOR plus 6.25%; interest-only payments continue through 2021, with principal and interest payments thereafter through October 2023. The filing states that the remaining $35.0 million of the $65.0 million facility was undrawn.
Material changes versus the prior comparable period
- Revenue increased $2.2 million, or approximately 60%, in the second quarter and $6.1 million, or approximately 127%, for the first six months, primarily because RHOFADE was acquired in November 2018 and began contributing sales.
- Research and development expense increased $3.6 million in the quarter and $10.0 million year to date, driven principally by Phase 3 trials of A-101 45% for common warts and increased MK2 inhibitor development activity.
- Sales and marketing expense decreased $5.2 million in the quarter and $6.6 million year to date, primarily because the prior-year periods included ESKATA launch and related promotional costs.
- The company recorded an $18.5 million non-cash goodwill impairment charge in the second quarter, writing off all goodwill after a decline in its stock price triggered an interim impairment analysis.
- The company recorded $1.7 million of RHOFADE-related intangible amortization in the quarter and $3.3 million year to date; there was no comparable amortization in 2018.
- Operating cash use increased by $9.0 million year to date, while cash and cash equivalents declined $25.4 million during the period. Investing activities provided $27.6 million, primarily from net sales and maturities of marketable securities.
- Common shares outstanding increased from 41.2 million at December 31, 2018 to 41.3 million at June 30, 2019. Stock-based compensation was $9.7 million year to date.
Outlook, management commentary, risks and unusual items
Management stated that existing cash, cash equivalents and marketable securities were expected to fund operating and capital expenditure requirements for more than 12 months from the financial statement issuance date, based on current assumptions. Management also stated that additional capital would likely be required to commercialize A-101 45% if approved, complete ATI-450 development, advance preclinical programs and support discovery activities. Additional financing may be unavailable or could dilute existing stockholders.
The company completed enrollment in the THWART-1 and THWART-2 Phase 3 trials of A-101 45% for common warts and expected to report data in the second half of 2019. An ATI-450 Phase 1 trial was initiated in August 2019, after the reporting period. Management expected to submit an IND for ATI-1777 by the end of the first half of 2020.
Clinical and portfolio developments were mixed. ATI-502 did not achieve statistical superiority in a Phase 2 alopecia areata trial, and further development for vitiligo was discontinued. The company intended to seek strategic partners for ATI-501 and ATI-502. In August 2019, after the reporting period, Aclaris voluntarily discontinued U.S. commercialization of ESKATA and withdrew non-U.S. marketing authorizations, citing insufficient market acceptance and sales rather than efficacy or safety concerns. It continued to maintain the U.S. NDA and seek a strategic partner.
A purported securities class action was filed on July 30, 2019, alleging misleading statements and omissions concerning ESKATA advertising. The company disputed the claims, intended to defend the matter, and could not estimate potential liability or financial exposure.
Key operating risks include continued losses and negative operating cash flow, dependence on additional financing, clinical and regulatory uncertainty, reliance on Allergan for RHOFADE distribution, customer concentration, third-party manufacturing dependence, royalty and milestone obligations, variable interest-rate debt, and potential Nasdaq listing noncompliance. The filing states that delisting could also trigger acceleration provisions under the Oxford loan agreement.
Most important facts for investors to verify
- Whether RHOFADE sales and net revenue growth can offset the loss of ESKATA commercialization and continuing operating cash burn.
- The company’s actual cash runway under revised post-August 2019 operating plans and whether additional equity, debt or strategic financing will be required.
- Results and regulatory implications of the THWART-1 and THWART-2 Phase 3 trials for A-101 45%.
- The outcome and potential financial exposure of the ESKATA-related securities class action.
- Compliance with Nasdaq listing requirements and the effect of any delisting on the Oxford debt facility.
- RHOFADE distribution economics, Allergan royalties, customer concentration and the collectability of the $18.5 million Allergan-related receivable.
- Potential milestone, royalty and contingent consideration obligations, including obligations related to Allergan, Rigel, Vixen, Confluence and other licensors.