ElectroCore, Inc. 2019 Q1 Form 10-Q Summary
Business context and reporting period
ElectroCore is a commercial-stage bioelectronic medicine company developing and commercializing gammaCore, a non-invasive vagus nerve stimulation therapy. The product is FDA-cleared for acute migraine and episodic cluster headache treatment and cluster headache prevention. The report covers the three months ended March 31, 2019, with comparison to the three months ended March 31, 2018. The company completed its IPO and corporate conversion in June 2018, so certain per-share and equity comparisons with 2018 are not meaningful.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $409.6 thousand | $81.2 thousand | +$328.4 thousand |
| Gross profit | $251.8 thousand | $32.2 thousand | +$219.5 thousand |
| Gross margin | 61.5% | 39.7% | +21.8 percentage points |
| Research and development | $3.5 million | $2.3 million | +$1.2 million |
| Selling, general and administrative | $11.0 million | $6.8 million | +$4.2 million |
| Loss from operations | $(14.2) million | $(9.1) million | Loss increased $5.1 million |
| Net loss | $(13.9) million | $(9.5) million | Loss increased $4.4 million |
| Basic and diluted loss per share | $(0.47) | Not presented | Not comparable |
| Net cash used in operating activities | $(16.4) million | $(9.7) million | Use increased $6.7 million |
At March 31, 2019, cash and cash equivalents were $7.0 million, marketable securities were $45.4 million, and total cash, cash equivalents and marketable securities were $52.4 million, compared with $68.6 million at December 31, 2018. Working capital was $51.9 million versus $65.6 million at year-end 2018. The company reported no outstanding debt. Total liabilities were $9.3 million, including $4.2 million of operating lease liabilities recognized upon adoption of the new lease standard.
Investing activities provided $15.8 million, primarily from net maturities of marketable securities, partially offsetting operating cash burn. The company believes available resources will fund operations for at least the next 12 months, but expects continuing negative operating cash flow and may require additional equity or debt financing for longer-term needs.
Material changes versus the prior comparable period
- Net sales increased approximately 404%, driven primarily by the 2018 U.S. commercial launch and increased selling activity. U.S. sales were $276.5 thousand, compared with $9.6 thousand in Q1 2018.
- Revenue growth substantially exceeded reported commercial sales because voucher units equivalent to approximately $1.6 million of gammaCore sales were dispensed in Q1 2019 but excluded from net sales. The comparable Q1 2018 amount was approximately $0.2 million.
- Operating expenses increased 58%, reflecting higher headcount, expanded commercialization, marketing, clinical studies, professional fees and voucher-program costs.
- R&D expense increased due primarily to higher clinical-study costs, personnel, consulting and stock compensation.
- SG&A increased despite a $1.4 million decrease in consulting expense; major increases included personnel, marketing, professional fees and voucher-program costs.
- The company adopted ASC Topic 842 on January 1, 2019, recording $3.9 million of operating lease right-of-use assets and $4.2 million of lease liabilities.
- Stock-based compensation increased to $744 thousand from $267 thousand. The company granted 784,173 stock options and 187,088 restricted shares during the quarter.
- The prior-period warrant-liability remeasurement expense did not recur in Q1 2019. Q1 2019 also included $16.7 thousand of expense related to warrants issued in settlement of a lawsuit.
Guidance, outlook, commentary and risks
- Management expects substantial net losses and negative operating cash flow for at least the next several years while commercializing gammaCore and expanding clinical programs.
- The company expanded its commercial organization to 32 territory business representatives and three medical science liaisons covering approximately 6,400 target physicians.
- Approximately 6,100 prescriptions were written in Q1 2019, versus approximately 5,800 in Q4 2018; prescriptions dispensed were approximately 3,000 in both quarters.
- Management reported reimbursement access covering approximately 10 million lives through non-preferred medical and pharmacy reimbursement and an additional 30 million pharmacy-benefit lives through medical-exception coverage. It targets 100 million covered lives by the end of 2019.
- In January 2019, gammaCore became available under a five-year Federal Supply Schedule Medical Equipment and Supply contract serving Department of Veterans Affairs and Department of Defense patients.
- The Partners for Coverage program was expanded in February 2019 to provide eligible patients with voucher therapy for up to 12 months while insurance coverage is pursued. The enhanced co-payment program provides reductions of up to $300 for the first month and $250 for each refill for up to 12 months.
- Key risks include limited commercial history, dependence on gammaCore sales and reimbursement, uncertain market acceptance, reliance on a specialty pharmaceutical distributor, continued cash burn, need for future capital, competition, regulatory and clinical-development uncertainty, and potential dilution or restrictive terms from future financing.
- Lifehealthcare Pty Ltd alleged breaches related to a terminated Australian joint venture, primarily concerning notification of the IPO. ElectroCore disputes the claims; management cannot predict the outcome but does not expect a material financial impact.
- The company settled a former-advisor dispute in January 2019 for $325,000 in cash and warrants to purchase 62,181 common shares.
- Management stated that disclosure controls were effective and that the previously disclosed material weakness related to complex transaction accounting had been remediated.
Most important facts for investors to verify
- Whether prescription growth and expanded payer access translate into recurring paid sales rather than increased voucher or assistance-program usage.
- The sustainability of the 61.5% reported gross margin as production volumes, product mix and promotional programs change.
- Cash runway given $16.4 million of quarterly operating cash usage and $52.4 million of cash and marketable securities at quarter-end.
- Future financing requirements, potential equity dilution, and the terms of any debt or equity issuance.
- The extent to which reported revenue depends on one specialty pharmaceutical distributor and the effect of rebates, vouchers, co-payment assistance and other variable consideration.
- Progress toward the company’s 100-million-covered-lives target and commercial adoption of gammaCore Sapphire.
- Outcome and potential exposure from the Lifehealthcare claim and any other contingencies.