Aptevo Therapeutics Inc. 10-Q Summary
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the period ended June 30, 2016. Aptevo Therapeutics Inc. is a biotechnology company focused on novel oncology and hematology therapeutics. The financial statements are presented on a "carve-out" basis, reflecting Aptevo's operations as a subsidiary of Emergent BioSolutions Inc. prior to its spin-off. On August 1, 2016, Aptevo became an independent publicly traded company following a pro-rata distribution of its common stock to Emergent shareholders.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Total Revenues | $18,260 | $18,753 |
| Net Loss | $(25,728) | $(28,738) |
| Net Loss Per Share (Basic & Diluted) | $(1.27) | $(1.42) |
| Cash and Cash Equivalents (End of Period) | $5,496 | $4,051 |
| Net Cash Used in Operating Activities | $(30,063) | $(31,721) |
| Total Assets | $118,159 | $112,456 |
| Total Liabilities | $20,962 | $23,838 |
Revenue Composition: Product sales accounted for $18.1 million (99% of total revenue), driven primarily by IXINITY ($4.2 million), WinRho ($7.7 million), HepaGam ($4.5 million), and VARIZIG ($1.6 million). Collaboration revenue was minimal at $0.2 million.
Cost Structure: Cost of product sales was $10.1 million. Research and development (R&D) expenses were $15.7 million, and Selling, General, and Administrative (SG&A) expenses were $18.3 million.
Material Changes vs. Prior Period
- Revenue: Total revenue decreased slightly by 3% ($0.5 million) compared to the prior year period. This was due to a significant drop in collaboration revenue (down $5.3 million, primarily due to a one-time $5.0 million milestone payment recognized in 2015 from MorphoSys) partially offset by a 36% increase in product sales revenue ($4.8 million increase), driven by IXINITY sales following its FDA approval in April 2015.
- Net Loss: Net loss improved by $3.0 million (10%) to $25.7 million, primarily due to reduced R&D expenses.
- R&D Expenses: Decreased by $3.9 million (20%) to $15.7 million. The reduction was largely attributed to decreased manufacturing process development activities for IXINITY and timing of clinical trial activities, partially offset by increased spending on the ES425 program.
- SG&A Expenses: Decreased by $2.1 million (10%) to $18.3 million, driven by lower pre-launch selling and marketing costs for IXINITY in 2015.
Guidance, Outlook, Risks, and Unusual Items
Capital Resources and Liquidity: Management expects the initial cash funding from Emergent ($45.0 million received at spin-off) and a committed promissory note for an additional $20.0 million to support operations for at least 12 months. On August 4, 2016, Aptevo entered into a $35.0 million credit facility (LIBOR + 7.60%), with the first tranche of $20.0 million funded immediately.
Outlook and Commentary: The company is transitioning to a standalone entity. Future capital requirements depend on the progress of clinical trials and commercialization of products. The company expects to incur losses for the foreseeable future.
Key Risks and Contingencies:
- Manufacturing Supply Chain: CMC ICOS Biologics, the exclusive manufacturer of bulk drug substance for IXINITY, has failed to successfully manufacture or release any lots in 2016 after only one successful lot in 2015. This poses a significant risk of supply shortage for IXINITY.
- Clinical Development Setbacks: The Phase 1 trial for MOR209/ES414 (prostate cancer) encountered issues with anti-drug antibodies (ADA) in patients receiving weekly doses. The protocol was amended to continuous intravenous infusion, and the collaboration agreement with MorphoSys was restructured, reducing potential milestone payments and increasing Aptevo's cost-sharing responsibility.
- Intellectual Property: Aptevo is involved in five opposition proceedings in Europe regarding IXINITY patents. An adverse outcome could impact the ability to conduct fill-finish manufacturing in Europe or sell factor IX products there.
- Trademark Dispute: Bristol-Myers Squibb has filed a notice of opposition to several Aptevo trademark applications.
Investor Verification Checklist
- IXINITY Supply Status: Verify the current status of bulk drug substance manufacturing with CMC ICOS Biologics and the risk of FDA notification regarding supply shortages.
- MOR209/ES414 Clinical Progress: Confirm the timeline for the re-started Phase 1 trial under the amended protocol and the impact of the restructured MorphoSys agreement on future funding and milestones.
- European Patent Oppositions: Monitor the status of the five European Patent Office opposition proceedings regarding IXINITY and the potential need to relocate fill-finish manufacturing.
- Post-Spin-Off Financials: Review the first standalone financial report to assess actual operating costs compared to the allocated "carve-out" expenses presented in this filing.
- Debt Covenants: Review the specific financial covenants in the new $35.0 million credit agreement, particularly the revenue thresholds required to access the second tranche of funding.