Aclaris Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2018, filed August 3, 2018. Aclaris is a dermatologist-led biopharmaceutical company developing and commercializing therapies for dermatology and immunology. The company launched ESKATA for raised seborrheic keratosis in the United States in May 2018 and operates a contract research business through its Confluence subsidiary, acquired in August 2017.
Financial condition and key metrics
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Revenue | $3.7 million | $4.8 million |
| Gross profit | $2.5 million | $2.6 million |
| Gross margin | 67.9% | 55.2% |
| Operating loss | $(32.0) million | $(62.9) million |
| Net loss | $(31.2) million | $(61.4) million |
| Net loss per share | $(1.01) | $(1.99) |
| Operating cash flow | Not separately provided | $(43.7) million |
- Second-quarter revenue consisted of $1.5 million of net ESKATA product sales, $1.1 million of contract research revenue and a $1.0 million upfront payment from Cipher Pharmaceuticals. Six-month revenue included $2.3 million of contract research revenue.
- Operating expenses were $34.5 million in the quarter and $65.6 million for the six months, including research and development of $14.0 million and $27.6 million, respectively, and sales and marketing of $12.4 million and $23.6 million, respectively.
- Cash, cash equivalents and marketable securities totaled $164.6 million at June 30, 2018, consisting of $46.0 million of cash and cash equivalents and $118.6 million of current marketable securities.
- Total assets were $201.8 million and accumulated deficit was $220.9 million at June 30, 2018.
- Total liabilities were $27.6 million. The filing does not report conventional borrowings or a material line of credit; liabilities included $5.2 million of acquisition-related contingent consideration and capital lease obligations.
- Investing activities provided $69.5 million during the first six months, primarily from net sales and maturities of marketable securities. Financing activities provided $0.1 million.
- Stock-based compensation expense was $5.2 million in the quarter and $10.4 million for the six months.
Material changes versus the prior comparable periods
- Revenue increased from zero in the 2017 comparable periods to $3.7 million in the quarter and $4.8 million year to date, reflecting the ESKATA launch, the Confluence acquisition and the Cipher licensing payment.
- Second-quarter net loss increased by $16.4 million year over year, while the six-month net loss increased by $34.1 million. The deterioration primarily reflected substantially higher research and development, sales and marketing, and general and administrative spending.
- Six-month research and development expense increased $11.9 million, driven principally by JAK inhibitor development, Confluence drug discovery activities, personnel costs and the $0.9 million change in fair value of contingent consideration. ESKATA development spending declined as clinical development had substantially been completed.
- Six-month sales and marketing expense increased $20.0 million as the company prepared for and executed the ESKATA launch, including hiring a 50-person field sales force.
- Cash and marketable securities declined from $208.9 million at December 31, 2017 to $164.6 million at June 30, 2018, while cash and cash equivalents increased from $20.2 million to $46.0 million because of portfolio maturities and sales.
- The company adopted ASC Topic 606 on January 1, 2018 using the modified retrospective method, with no transition adjustment and no restatement of comparative periods.
Guidance, outlook, risks and unusual items
- Management expects continued net losses for the next several years as it commercializes ESKATA, funds clinical development and expands discovery capabilities. Sales and marketing expenses are expected to increase, including direct-to-consumer advertising planned for the fourth quarter of 2018.
- The company expected to initiate Phase 3 trials of A-101 45% Topical Solution for common warts in the second half of 2018, report data in the second half of 2019 and submit an NDA thereafter if results were positive.
- Management reported that existing cash, cash equivalents and marketable securities were expected to fund operations for more than 12 months from the financial statement issuance date under current assumptions. Additional capital is expected to be required for clinical development, commercialization, discovery and potential acquisitions or licenses.
- Key risks include uncertain ESKATA commercial adoption, reliance on McKesson as the only direct product customer, clinical and regulatory failure or delay, inability to obtain additional financing, manufacturing and supply risks, intellectual property challenges, and substantial milestone, royalty and contingent consideration obligations.
- Contingent consideration related to the Confluence acquisition was $5.2 million at June 30, 2018, up from $4.4 million at year-end, because soft-JAK inhibitor research progressed more quickly than originally planned. The acquisition agreement permits up to $80.0 million of additional milestone payments and royalties.
- The company recorded a $1.5 million commercial milestone payment under the KPT Finder’s Services Agreement during the quarter. Up to $3.0 million of additional commercial milestone payments remain possible under that agreement.
- Other contractual exposures include potential payments of up to $80.0 million plus $10.0 million under the Rigel license, up to $40.5 million under the Vixen agreement, up to $11.6 million under the Columbia license, royalties under various agreements, and lease commitments totaling $5.0 million.
- No material legal proceedings or off-balance-sheet arrangements were reported. Management stated that risk factors had not materially changed from the 2017 Form 10-K.
Most important facts for investors to verify
- Whether ESKATA sales growth and provider adoption can become sufficient to offset the company’s expanding commercial and research spending.
- The level of product returns, rebates, chargebacks, administrative fees and channel inventory associated with ESKATA revenue.
- Cash burn and runway as Phase 3 development, JAK inhibitor trials and ESKATA commercialization progress.
- Clinical and regulatory milestones for A-101 45%, ATI-501, ATI-502 and Confluence-derived programs.
- The timing and potential magnitude of milestone, royalty and contingent consideration payments.
- Whether additional equity, debt or strategic financing will be required and the resulting dilution or financing risk.