Business Context and Reporting Period
Prothena Corporation plc is an Ireland-incorporated clinical-stage biotechnology company developing monoclonal antibodies for diseases involving protein misfolding or cell adhesion, including NEOD001, PRX002 and PRX003. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
The company entered into a license, development and commercialization agreement with Roche for alpha-synuclein antibodies, including PRX002. The agreement became effective in January 2014 and generated a $30.0 million upfront payment received in February 2014.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $32.2 million | $0.2 million |
| Collaboration revenue | $32.1 million | None |
| Related-party revenue | $0.1 million | $0.2 million |
| Research and development expense | $9.3 million | $6.0 million |
| General and administrative expense | $4.9 million | $3.2 million |
| Total operating expenses | $14.2 million | $9.1 million |
| Income (loss) from operations | $18.0 million | $(9.0) million |
| Net income (loss) | $17.9 million | $(9.0) million |
| Basic earnings (loss) per share | $0.82 | $(0.51) |
| Diluted earnings (loss) per share | $0.78 | $(0.51) |
| Net cash provided by (used in) operating activities | $17.9 million | $(5.1) million |
| Cash and cash equivalents at period end | $195.1 million | $119.6 million |
Q1 2014 operating margin was approximately 55.9%, compared with a negative operating margin in Q1 2013. The reported profit was primarily driven by the one-time Roche upfront payment and is not representative of expected recurring operating performance.
At March 31, 2014, total assets were $203.8 million, total liabilities were $10.8 million and shareholders’ equity was $193.0 million. Working capital was $190.6 million. The company had no debt reported in the filing; non-current liabilities consisted primarily of $1.8 million of deferred rent.
Material Changes Versus the Prior Comparable Period
- Revenue increased by approximately $32.1 million, primarily because of the Roche agreement. The $30.0 million upfront payment was recognized as collaboration license revenue, with additional Roche-related development and research reimbursements recognized in the quarter.
- R&D expense increased 57% to $9.3 million, driven by higher personnel, external development and manufacturing costs, particularly for PRX002 and PRX003, as well as Roche-related cost-sharing activity.
- G&A expense increased 53% to $4.9 million, primarily due to increased personnel, share-based compensation and legal and administrative costs associated with operating as a public company.
- Share-based compensation increased to $1.3 million from $0.3 million. Approximately $16.9 million of unearned share-based compensation remained to be recognized through 2017, subject to future awards, forfeitures and modifications.
- Cash increased $18.4 million from December 31, 2013, primarily reflecting the Roche upfront payment. Operating cash flow changed from a $5.1 million use in Q1 2013 to a $17.9 million source in Q1 2014.
- In February 2014, Perrigo’s subsidiary sold 3.2 million Prothena shares at $26.00 per share. Prothena received no proceeds and its outstanding share count did not change as a result.
Guidance, Outlook, Risks and Unusual Items
Management stated that existing cash and cash equivalents were sufficient to meet obligations for at least the next twelve months based on current plans. However, the company expects substantial losses for the foreseeable future and anticipates needing additional capital to continue development. Future financing may involve equity dilution, debt obligations or less favorable licensing and collaboration terms.
- R&D spending is expected to increase in 2014 due to PRX003 manufacturing and toxicology work, planned Phase 2/3 development of NEOD001, and PRX002 Phase 1 and related Roche cost-sharing activities.
- G&A spending is expected to increase because of additional personnel, legal and administrative costs.
- In April 2014, Prothena and Roche initiated a Phase 1 study of PRX002. This triggered a $15.0 million Roche clinical milestone payment, which was not recognized in Q1 2014 and is a subsequent event.
- The company reported interim NEOD001 findings in April 2014 and stated that the results supported planned advancement into a Phase 2/3 study later in 2014. These findings are interim and do not establish clinical or regulatory success.
- Under the Roche arrangement, Roche may pay up to $380.0 million in development, regulatory and first-commercial-sale milestones, up to an additional $175.0 million in ex-U.S. commercial milestones, and tiered royalties. These amounts are contingent and are not assured.
- For U.S. Parkinson’s disease development and commercialization, Roche and Prothena share costs and profits on a 70%/30% basis if Prothena remains opted in. Prothena may instead opt out and receive specified milestones and royalties.
- Roche may terminate the agreement at will after the first anniversary, subject to notice requirements, and the company is dependent on Roche for development, commercialization and, eventually, product manufacturing and supply.
- Contractual obligations totaled approximately $18.8 million, comprising $13.0 million of operating leases, $4.7 million of purchase obligations and $1.0 million of license-related obligations. Roche cost-sharing obligations were excluded because the filing states they could not yet be determined.
- The company depends on Boehringer Ingelheim for clinical drug supplies and has no manufacturing capacity. Clinical, regulatory, supply, intellectual-property, reimbursement, competition, key-personnel and product-liability risks could materially affect results.
- The filing reports no material legal proceedings and no off-balance-sheet arrangements.
Most Important Facts for Investors to Verify
- Whether the $30.0 million Roche upfront payment and the April 2014 $15.0 million milestone are properly distinguished as nonrecurring versus potentially recurring collaboration economics.
- Progress, safety and efficacy results from the NEOD001 and PRX002 clinical programs, including whether the planned NEOD001 Phase 2/3 study proceeds.
- Roche’s continued funding, development execution and retention of the PRX002 license, including potential termination and opt-out provisions.
- The pace of cash burn after excluding the Roche upfront payment and the resulting timing and terms of any future financing.
- The company’s 30% share of U.S. PRX002 development and commercialization costs if it remains opted in, together with the economics of its co-promotion option.
- Clinical manufacturing capacity, supplier concentration and the ability of third parties to meet regulatory and supply requirements.
- Future dilution from outstanding options and the proposed increase of 2.9 million shares authorized under the long-term incentive plan, subject to shareholder approval.