Avalo Therapeutics, Inc. annual report, FY2018

Business context and reporting period

The filing is Cerecor Inc.’s Form 10-K for the fiscal year ended December 31, 2018; it does not provide standalone fourth-quarter results. Although the request identifies Avalo Therapeutics, the filing names Cerecor Inc. as the registrant. Cerecor combined a portfolio of marketed pediatric products with research and development programs in neurology and rare pediatric diseases. It acquired Avadel’s pediatric products in February 2018 and Ichorion’s rare-disease assets in September 2018.

Financial performance and liquidity

Product revenue increased substantially as 2018 included a fuller year of TRx sales and nearly a full year of Avadel product sales. Total revenue fell approximately 34% because 2017 included $25.0 million of CERC-501 licensing revenue from Janssen and $0.6 million of grant revenue, neither of which recurred in 2018. Product cost was $7.5 million; product revenue less that cost implies an approximate 58% gross margin, though product cost includes minimum purchase and royalty obligations. Research and development expense was $5.8 million, sales and marketing $8.5 million, and general and administrative $10.7 million. Adjusted EBITDA, a company-defined non-GAAP measure, was a loss of $10.0 million.

At year-end, current assets were $21.9 million and current liabilities $26.2 million. Total liabilities were $49.3 million. Debt was approximately $15.4 million, including a $1.1 million current portion; the assumed Deerfield obligation includes quarterly payments of $262,500 through October 2020 and a $15.25 million balloon payment due January 2021. Management expected cash and anticipated product revenue to fund operations and scheduled debt payments through at least March 2020, but also said additional financing would be needed to execute its development strategy and/or fund future operations.

Material changes and notable items

• Net results shifted from $11.9 million income in 2017 to a $40.1 million loss in 2018. The loss included $18.7 million of immediately expensed acquired in-process R&D related to Ichorion’s preclinical assets.
• Commercial operating costs expanded following the product acquisitions. Cerecor also recorded $4.5 million of intangible amortization and a $1.9 million impairment after termination of the PAI sales and marketing agreement.
• Operating cash flow was negative despite the year-end cash increase; cash rose mainly through $10.4 million of financing proceeds, including $3.9 million from an August common-stock placement and $5.7 million from an Armistice preferred-stock transaction.
• Subsequent to year-end, a March 2019 public offering generated approximately $9.0 million net proceeds. The filing reports 42.7 million common shares outstanding as of March 11, 2019, before considering all potential dilution.

Outlook, risks and contingencies

Cerecor expected to continue incurring significant expenses and operating losses while advancing its pipeline. CERC-301 was in a Phase 1 safety study for neurogenic orthostatic hypotension, with data expected in the first half of 2019. CERC-801 received FDA permission to proceed with an IND and Fast Track designation in early 2019; the company planned a Phase 1 study in 2019. IND filings for CERC-802 and CERC-803 were expected in 2019 and 2020, respectively. The three CERC-800-series candidates had Rare Pediatric Disease designation and Orphan Drug Designation; any priority review voucher or exclusivity benefit depends on eventual approval and applicable program terms.

Key risks include clinical and regulatory failure or delay, dependence on acquired product sales, competition and reimbursement pressure, reliance on third-party manufacturers, and the need for additional capital. The CERC-611 program remained subject to a partial clinical hold with exposure limits the company described as permitting subtherapeutic dosing. Armistice beneficially owned approximately 60% of common stock, creating significant ownership concentration and potential influence over corporate matters.

An Ulesfia-related arbitration ruling led Cerecor to treat minimum purchase and royalty obligations as active. The company recorded a $7.8 million liability at year-end and a $4.9 million indemnity receivable it believed collectible; failure to make required payments could result in loss of the right to sell Ulesfia. The filing also discloses up to $15 million of Ichorion development milestones and ongoing product-specific royalties and minimum sales commitments.

Important facts for investors to verify

• Confirm the registrant identity and reporting period: the supplied filing is Cerecor Inc.’s FY 2018 10-K, not a filing under the Avalo Therapeutics name, and does not contain standalone Q4 financials.
• Assess cash runway against the company’s stated March 2020 funding horizon, planned clinical spending, and the $15.25 million Deerfield balloon payment due in January 2021.
• Review the assumptions and recoverability of the $4.9 million Ulesfia indemnity receivable, the $7.8 million accrued obligations, and the timing and amount of future payments.
• Track product sales, customer concentration, gross-to-net estimates, and minimum commercial commitments, including the Karbinal make-whole provision and Avadel-related royalties.
• Evaluate dilution and control implications from the Armistice transactions, convertible preferred stock, warrants, equity plans, and the subsequent 2019 offering.
• Verify clinical progress and regulatory status for CERC-301, CERC-611, and the CERC-800 series; the stated milestones are forward-looking and subject to substantial uncertainty.