Aptevo Therapeutics Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report. Aptevo is a biotechnology company with one marketed product, IXINITY, and investigational candidates built around its ADAPTIR platform.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $23.1 million | $14.7 million |
| IXINITY product sales | $23.1 million | $10.9 million |
| Gross profit / margin | $11.9 million / 51% | $5.9 million / 54% |
| Research and development | $35.4 million | $29.0 million |
| Selling, general and administrative | $28.1 million | $34.6 million |
| Net income (loss) | $(53.7) million | $7.0 million |
| Net cash used in operating activities | $(51.4) million | $(41.6) million |
| Cash and cash equivalents at year-end | $30.6 million | $7.1 million |
| Total cash, cash equivalents and restricted cash | $38.1 million | $17.5 million |
| Long-term debt, net | $19.3 million | $15.7 million |
Revenue increased 57%, driven by 111% growth in IXINITY sales. Cost of product sales rose 124%, faster than sales, and gross margin declined three percentage points. The 2017 net income included $39.6 million of income from discontinued operations following the sale of the Hyperimmune Business; 2018 results reflect continuing operations.
At December 31, 2018, current assets were $48.7 million and current liabilities were $17.6 million. The balance sheet included $7.4 million of restricted cash, including $5.0 million required under the MidCap credit agreement and $2.4 million securing letters of credit. The company reported $19.3 million of long-term debt, net; the credit facility bears interest at LIBOR plus 7.60% and matures February 1, 2023. Scheduled principal and interest payments totaled $26.9 million as of year-end.
Aptevo said available cash was expected to fund operations for at least 15 months from the filing date, while the going-concern note states funding was expected through March 18, 2020. In March 2019, after year-end, the company raised $22.0 million gross in a stock-and-warrant offering, before expenses.
Material changes and operating developments
- IXINITY sales rose from $10.9 million to $23.1 million, attributed to patient-base and distribution-channel expansion.
- R&D expense increased $6.4 million, primarily due to clinical-material manufacturing and pipeline research. SG&A declined $6.4 million, mainly from lower personnel and professional-services costs.
- Aptevo discontinued development of APVO414 and otlertuzumab in 2018. APVO414 faced anti-drug antibody development that could clear the drug from patients’ blood; otlertuzumab’s PTCL study showed limited early responses and lower-than-expected CD37 expression in tested tumors.
- The company began a Phase 1/1b APVO436 trial in AML and MDS in December 2018. APVO210 was scheduled to begin a Phase 1 study in healthy volunteers in Australia in March 2019. Aptevo and Alligator planned to seek clinical trial authorization for ALG.APV-527 in the fourth quarter of 2019.
Outlook, risks and unusual items
- Management expects continuing operating losses and negative cash flow while it funds research and clinical development. It states that current resources are insufficient to complete clinical development of any pipeline candidate; additional financing, partnerships or spending reductions may be needed.
- IXINITY is the sole marketed product and product-revenue source. Revenue therefore depends on its sales, reimbursement, supply, competition and distribution. Two specialty customers accounted for 89% of 2018 revenue, creating significant customer concentration.
- IXINITY supply relies on third parties, including a sole-source bulk drug manufacturer and sole-source fill-finish provider. The filing describes historical manufacturing lot failures and potential disruption if suppliers cannot meet requirements.
- MidCap’s security interest in registered intellectual property became effective in January 2019 after unrestricted cash fell below $25 million. The lender may enforce its collateral rights if Aptevo fails to satisfy credit obligations.
- Potential additional proceeds from the 2017 Hyperimmune Business sale include up to $7.5 million tied to gross-profit milestones, potentially collectible in the fourth quarter of 2020, and up to $2.0 million tied to certain receivables. These amounts are contingent, not assured.
- Management identified clinical, regulatory, manufacturing, reimbursement, financing, competition, intellectual-property and dilution risks. The March 2019 offering included warrants; the filing states that warrant exercise could provide additional proceeds but also create dilution.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2018.
Important facts for investors to verify
- IXINITY revenue growth, gross margin, customer concentration, and whether sales growth converts into improved cash generation.
- Cash runway and burn rate, including the difference between the filing’s 15-month liquidity statement and the going-concern note’s March 18, 2020 horizon.
- Terms and dilution implications of the March 2019 offering, outstanding warrants, and available equity financing arrangements.
- MidCap debt covenants, scheduled payments, restricted cash requirements, and the lender’s security interest in intellectual property.
- Clinical progress and reported safety data for APVO436 and APVO210, and whether planned milestones for ALG.APV-527 are achieved.
- Whether the contingent Saol payments are earned and collected, and whether manufacturing, reimbursement, or regulatory issues affect IXINITY.