Cocrystal Pharma, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Cocrystal is a clinical-stage biotechnology company developing antiviral drug candidates; it had no products approved for sale and was primarily funded through equity offerings.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data and share counts. The company reported no product sales; revenue was from its Merck research collaboration.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $0.554 | $0.592 | $1.015 | $5.670 |
| Research and development expense | $1.976 | $1.091 | $3.259 | $1.969 |
| General and administrative expense | $2.028 | $1.051 | $3.167 | $2.374 |
| Net income (loss) | $(3.495) | $(1.515) | $(5.485) | $1.456 |
| Basic and diluted earnings (loss) per share | $(0.07) | $(0.05) | $(0.12) | $0.05 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $(4.388) | $0.990 |
At June 30, cash was $19.315 million and restricted cash was $0.050 million, versus combined cash and restricted cash of $7.468 million at year-end 2019. Management said cash was sufficient to fund planned operations through 2021. Six-month investing cash outflow was $0.220 million; financing cash inflow was $16.505 million, principally from equity offerings. There was no conventional debt reported; lease liabilities totaled $0.706 million ($0.613 million operating and $0.093 million finance). Current assets were $20.102 million and current liabilities $2.943 million. No meaningful product gross margin was reported.
Material changes versus comparable periods
- Six-month revenue fell 82% year over year, largely because 2019 included $4.368 million recognized for intellectual-property rights conveyed under the Merck agreement. Current collaboration revenue reflects R&D reimbursement.
- Q2 R&D expense rose to $1.976 million from $1.091 million, primarily due to coronavirus and influenza programs. Six-month R&D expense increased to $3.259 million from $1.969 million.
- Q2 G&A expense increased to $2.028 million from $1.051 million, primarily reflecting litigation costs, higher insurance expense and executive compensation. Six-month G&A expense rose to $3.167 million from $2.374 million.
- The six-month 2020 operating cash outflow compared with positive operating cash flow in 2019, which benefited from the $4 million Merck upfront payment.
- Three registered direct offerings raised $16.606 million net in the first half. Shares outstanding increased from 35.150 million at December 31, 2019 to 52.141 million at June 30, 2020.
Outlook, risks and contingencies
- Under its Merck influenza collaboration, Merck funds program R&D, including clinical development, and handles worldwide commercialization. Cocrystal received a $4 million upfront payment in 2019 and may earn up to $156 million in development, regulatory and sales milestones plus royalties. Merck may terminate the agreement before first commercial sale at its discretion.
- CC-42344 was selected as an influenza preclinical lead; the company planned additional IND-enabling work and a Phase 1 study in 2021. For coronavirus, it began preclinical studies in Q2 2020, planned to identify additional replication inhibitors in Q3 and select a lead preclinical molecule in Q4 2020. A norovirus proof-of-concept animal study was expected in Q4 2020.
- For HCV candidate CC-31244, the Phase 2a study was completed; 8 of 12 participants achieved SVR12. The company was discussing further development partnerships, with no assurance of an agreement. An investigator-initiated study in Hong Kong was terminated effective March 24, 2020.
- The company had no recurring revenue sufficient to cover operating costs and stated that additional capital may be needed. Future financing could be unavailable or highly dilutive. On July 1, 2020, it entered an ATM agreement allowing up to $10 million in share sales; it had sold no shares under the ATM as of the filing date.
- COVID-19 had caused supply-chain and service-partner delays. Further disruption, laboratory-material shortages, reduced third-party availability and competition from better-funded or more advanced developers could delay programs or harm prospects. The company noted that COVID-19 program spending could negatively affect other programs.
- In June 2020, the company agreed to pay $450,000 toward a proposed class-action settlement, subject to court approval, and to make governance changes under a proposed derivative-action settlement. AGP sued over an alleged lock-up breach and sought more than $1 million plus fees; the company moved to dismiss. A separate insurer suit seeks to disclaim defense obligations and recover $1 million previously advanced; the company disputes the insurer’s position. A reopened Pederson lawsuit seeks $800,000 or other damages. The company said it could not estimate potential losses for the proceedings and recorded no loss contingency.
- Goodwill was $19.092 million. The company reported a $46.103 million impairment in 2019 and said its June 2020 assessment indicated no further impairment was required. Management cautioned that COVID-19 or changed estimates could result in material impairment.
Important facts for investors to verify
- Cash runway assumptions through 2021, ongoing operating cash burn and the timing or terms of any additional financing.
- Progress and actual timelines for the influenza Phase 1 plan, coronavirus lead selection and norovirus animal study.
- Merck collaboration funding, milestone conditions, concentration risk and Merck’s termination rights; all revenue and receivables were attributed to Merck.
- Whether the proposed settlements receive court approval, and the outcomes and potential costs of the AGP, insurer and Pederson litigation.
- Potential dilution from the 2020 offerings, the $10 million ATM facility and outstanding options and warrants.