Aptevo Therapeutics Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 9, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Aptevo is a biotechnology company developing oncology and hematology therapeutics using its ADAPTIR platform. On September 28, 2017, it completed the sale of its Hyperimmune Business, which included WinRho, HepaGam B and VARIZIG. IXINITY, a treatment for Hemophilia B, is now its only marketed product and its only product-sales source. Development candidates include APVO414 and otlertuzumab in clinical development and several preclinical programs.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016, restated | Nine months 2017 | Nine months 2016, restated |
|---|---|---|---|---|
| Continuing-operations revenue | $6.172 | $2.816 | $11.840 | $7.203 |
| IXINITY product sales | $2.506 | $2.816 | $8.131 | $7.050 |
| Continuing-operations loss from operations | $(10.348) | $(90.525) | $(37.128) | $(121.906) |
| Continuing-operations net income (loss) | $2.984 | $(73.409) | $(22.897) | $(103.733) |
| Net income (loss), including discontinued operations | $37.867 | $(71.741) | $16.733 | $(97.469) |
Q3 product-sales gross profit was $0.634 million, a 25% gross margin, compared with a $1.294 million gross loss and negative 46% margin in Q3 2016. For the first nine months, gross profit was $5.017 million, a 62% margin, versus a $0.337 million gross loss and negative 5% margin in 2016. The improvement principally reflects prior-period IXINITY inventory write-offs and a 2017 noncash settlement with the manufacturer, rather than a comparable increase in sales.
Q3 net income included $34.883 million of after-tax income from discontinued operations, including a $52.538 million pre-tax gain on the business sale. The 2017 net-income figures therefore do not represent recurring operating profitability. Continuing-operations results also benefited in comparison with 2016 from the absence of the $71.013 million goodwill and intangible-asset impairment recorded in 2016.
Q3 collaboration revenue was $3.666 million, primarily reflecting recognition of $3.7 million in previously deferred MorphoSys revenue after that collaboration ended. Aptevo reported no further revenue expected under that agreement. IXINITY sales decreased 11% year over year in Q3, partly because customers had increased orders in Q2; nine-month sales rose 15%, which management attributed primarily to growth in the Hemophilia B patient base.
Research and development expense was $7.175 million in Q3 and $19.835 million for nine months, down 13% year over year for the nine-month period. Selling, general and administrative expense was $7.473 million in Q3 and $26.019 million for nine months, down 33% and 7%, respectively, from comparable 2016 periods.
At September 30, cash and cash equivalents were $75.830 million, short-term investments $20.946 million, and restricted cash $10.400 million. Cash, cash equivalents and short-term investments totaled $96.776 million; restricted cash is separate. Total assets were $131.022 million, total liabilities $40.712 million, and stockholders’ equity $90.310 million. Long-term debt, net, was $17.484 million.
For the nine months, operating activities used $26.152 million of cash; investing activities provided $83.299 million, including $60.477 million of sale proceeds; financing activities provided $9.007 million. Cash and cash equivalents increased $66.154 million to $75.830 million. The company had an accumulated deficit of $63.958 million.
Material changes, outlook and risks
- Divestiture: Saol paid $65 million at closing, including $3.25 million held in escrow. Aptevo may receive up to $7.5 million in gross-profit milestones and up to $2 million from collection of certain receivables. The company expects future product revenue to decline following the sale.
- Funding outlook: Management said existing cash and investments were expected to fund operations for at least 15 months from the filing date in its overview; elsewhere, it said they would support operations for at least the next 12 months. The filing gives no formal revenue or earnings guidance. Management expects operating losses for the foreseeable future and says additional funding will be needed to complete development of its candidates.
- Debt and covenants: The MidCap facility bears interest at LIBOR plus 7.60%. The sale amendment terminated the remaining $15 million borrowing tranche and added a $10 million minimum unrestricted-cash covenant. Scheduled amortization may be deferred to February 1, 2019 if the specified $16 million trailing-12-month commercial-revenue target is achieved and maintained. A prior revenue-covenant default had been waived and covenants revised.
- IXINITY supply: CMC is the sole bulk drug-substance manufacturer, and the company previously experienced substantial manufacturing failures and notified the FDA of a potential supply interruption. A new batch restored commercial supply in 2017, and the amended supply agreement provides a $7 million reserve as a price concession; $2.6 million had been applied by September 30. Management did not anticipate an interruption but identified supply disruption as a material risk.
- Pipeline and collaborations: MorphoSys terminated its APVO414 collaboration effective August 31, 2017; Aptevo said it had no ongoing obligations under the agreement. Aptevo and Alligator plan to develop ALG.APV-527 through Phase II, subject to shared costs, opt-out rights and technical stage gates. Clinical, regulatory, manufacturing and collaboration outcomes remain uncertain.
- Taxes and reporting: The sale generated $23.076 million of income-tax expense for the nine-month period; management said this expense was expected to reverse in Q4 2017. The 2016 comparative statements were restated for a deferred-tax-liability error connected with acquired in-process R&D and the related goodwill impairment; the restatement changed reported line items but had no effect on 2016 net loss. Management reported disclosure controls effective at a reasonable-assurance level and no material control changes during the quarter.
- Other risks: The filing highlights continuing losses, potential need for financing, dependence on IXINITY and a single key supplier, drug-development and regulatory uncertainty, competition, reimbursement and pricing pressures, and the risk that debt-covenant breaches could accelerate repayment. Management reported no pending legal matter it believed could materially adversely affect the company.
Important facts for investors to verify
- Whether IXINITY sales and supply remain sufficient to support the revised debt covenants, including the $10 million unrestricted-cash minimum.
- How much of the $65 million sale consideration is ultimately available after escrow, working-capital adjustments, taxes and any indemnification claims, and whether contingent payments are earned or collected.
- The actual operating cash burn and runway after the divestiture; the filing gives both 12-month and at-least-15-month runway statements.
- Progress, costs and financing needs for APVO414, otlertuzumab, ALG.APV-527 and other pipeline programs, including the implications of MorphoSys’s termination.
- The Q4 treatment of the sale-related tax expense and the company’s continued remediation of the previously identified financial-reporting material weakness.