EyePoint Pharmaceuticals, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended June 30, 2018. The filing also presents unaudited quarterly results; FY2018 fourth quarter ended June 30, 2018. This is an annual report, not a standalone “2017 Q4” filing.
Business context
EyePoint is a pre-commercial ophthalmic biopharmaceutical company. Its FDA-approved DEXYCU, acquired with Icon Bioscience in March 2018, was planned for U.S. launch in the first half of calendar 2019. YUTIQ, a sustained-release treatment candidate for non-infectious posterior segment uveitis, had an NDA accepted with an FDA action date of November 5, 2018. Existing royalty-generating products include ILUVIEN, commercialized by Alimera, and Retisert, commercialized by Bausch + Lomb.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $3.0 million | $7.5 million |
| Operating expenses | $29.2 million | $26.1 million |
| Operating loss | $26.3 million | $18.6 million |
| Net loss | $53.2 million | $18.5 million |
| Net loss per share | $1.15 | $0.52 |
| Cash used in operations | $21.9 million | $20.5 million |
| Cash and cash equivalents at year-end | $38.8 million | $16.9 million |
| Long-term debt at year-end | $17.3 million carrying value; $20.0 million principal | None |
Revenue comprised collaborative research and development revenue of $1.3 million and royalty income of $1.6 million. There were no commercial sales of DEXYCU or YUTIQ in the period. The $5.6 million Pfizer-termination revenue recognized in FY2017 was nonrecurring, contributing to the year-over-year revenue decline. FY2018 royalty income rose 67%, partly due to $575,000 under the amended Alimera agreement.
FY2018 net loss included a $26.3 million noncash charge from changes in fair value of derivative liabilities related to the financing transactions and warrants. Fourth-quarter net loss was $34.4 million, including a $24.0 million derivative fair-value change; the quarter also included a $1.2 million out-of-period expense for a change not recorded in the prior quarter. Thus, the reported net loss substantially exceeded the operating loss.
Current assets were $39.9 million and current liabilities $21.7 million at June 30, 2018. The company raised approximately $35.0 million gross through 2018 equity transactions and borrowed $20.0 million under a secured term loan. The loan bears interest at three-month LIBOR, subject to a 1.5% floor, plus 10.50%; it matures March 27, 2023 and carries a 6% exit fee. The company stated that cash and expected collaboration receipts were expected to fund planned operations only into the first quarter of calendar 2019. The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern.
Material changes and outlook
- Revenue fell 61% year over year, primarily because FY2017 included the $5.6 million Pfizer termination recognition. Operating expenses increased 12%, and operating loss widened 41%.
- Research and development expense increased 9% to $16.2 million. Sales and marketing expense began in FY2018 as the company prepared for product launches.
- Management expected FY2019 R&D, sales and marketing, and general and administrative costs to rise significantly with launch preparation, commercial infrastructure, and ongoing operations. It forecast approximately $2.6 million of FY2019 interest expense, assuming LIBOR remained at 2.34%, plus about $652,000 of noncash debt-discount amortization.
- Management planned to launch DEXYCU and, subject to approval, YUTIQ in the first half of calendar 2019. These plans depended on manufacturing scale-up, commercial readiness, regulatory approval for YUTIQ, reimbursement, and further financing.
- DEXYCU qualified for Medicare transitional pass-through reimbursement, with its C-code effective October 1, 2018. Management said the status generally lasts three years from Medicare’s first pass-through payment; after that, payment may be bundled with cataract surgery, potentially reducing reimbursement and revenue. The company had not finalized DEXYCU pricing; it expected pricing modestly above $485.
- The Icon acquisition created substantial contingent obligations: a $15 million payment upon first U.S. commercial sale of DEXYCU, up to $95 million in sales milestones, and ongoing sales-based earn-outs. These obligations could materially affect future economics if sales develop.
Key risks and unusual items
- Financing is a critical risk: the filing states existing resources were expected to last into early 2019, and there was no assurance of additional capital or meaningful product revenue. Failure to raise funds could require reduced operations or delayed commercialization.
- The Second Tranche Warrants covered 20.2 million shares and were exercisable through September 28, 2018 following notice of the DEXYCU C-code. Full exercise was estimated to generate gross proceeds of approximately $17.8 million to $28.9 million, but proceeds were not assured; exercise could also be dilutive.
- The $19.8 million derivative liability was Level 3 and valued using unobservable inputs. Its remeasurement caused significant noncash earnings volatility.
- DEXYCU’s commercial supply depended on contract manufacturing and successful process scale-up. YUTIQ’s planned in-house commercial manufacturing required FDA approval and facility compliance; the FDA had issued inspection observations, to which the company said it responded.
- YUTIQ approval and launch remained uncertain at the filing date. Corticosteroid-related risks include elevated intraocular pressure and cataract formation; the filing also notes increased cataract surgery among YUTIQ-treated eyes in trial follow-up.
- Alimera’s financial condition and ability to commercialize ILUVIEN could affect EyePoint’s royalties. Retisert royalties may decline and are expected to end after the last relevant patent expires in April 2020.
- The term loan includes restrictive covenants, including a minimum cash balance of $4 million in specified accounts and financial performance requirements; default could accelerate repayment. The filing reports no material routine legal proceedings.
Most important facts for investors to verify
- Whether the Second Tranche Warrants were exercised before their September 28, 2018 expiry, and the resulting cash proceeds, dilution, and ownership concentration.
- YUTIQ’s FDA decision and any approval conditions, labeling restrictions, post-marketing requirements, or launch timing.
- DEXYCU launch execution, commercial supply, final pricing, pass-through reimbursement uptake, and reimbursement after the transitional period.
- Actual cash burn and financing needs relative to the stated early-2019 runway, including progress against the going-concern risk.
- Debt covenant compliance, interest and exit-fee burden, and payment timing for Icon’s milestone and earn-out obligations.
- Future Alimera and Bausch + Lomb sales, royalty receipts, and the effect of Alimera’s financial health on collaboration income.