Business Context and Reporting Period
Form 10-Q for the quarterly and six-month periods ended June 30, 2017. The filing identifies the registrant as Gemphire Therapeutics Inc., not Metavia Inc.; this company-name discrepancy should be verified. Gemphire is a clinical-stage biopharmaceutical company developing gemcabene for dyslipidemia and NAFLD/NASH. It had no approved products or revenue and reported 16 employees at June 30, 2017.
During 2016, the company initiated three Phase 2b trials for gemcabene: COBALT-1, ROYAL-1 and INDIGO-1. Management reported COBALT-1 topline data in the second quarter of 2017, expected ROYAL-1 topline data in August 2017, and expected INDIGO-1 topline data in the first quarter of 2018.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| General and administrative expense | $4.7 million | $1.1 million | $6.9 million | $2.1 million |
| Research and development expense | $5.8 million | $0.8 million | $11.1 million | $2.0 million |
| Total operating expenses | $10.5 million | $1.8 million | $18.0 million | $4.1 million |
| Net loss | $10.5 million | $1.4 million | $18.0 million | $3.5 million |
| Loss per share | $0.99 | $0.42 | $1.79 | $1.07 |
Cash and cash equivalents were $22.5 million at June 30, 2017, compared with $24.0 million at December 31, 2016. Total assets were $23.0 million and total liabilities were $5.3 million. The company had no debt outstanding at June 30, 2017 because its prior convertible notes had converted into common stock before the IPO.
Operating cash use was $12.8 million for the six months ended June 30, 2017, compared with $3.8 million in the prior-year period. Financing activities provided $11.3 million, primarily from a March 2017 private placement, resulting in a $1.5 million net decrease in cash during the period. There were no investing cash flows.
Share-based compensation was $3.0 million in the second quarter and $3.8 million for the first six months of 2017. The company recorded $2.1 million of non-cash expense from accelerated vesting of the former chief executive officer’s options and $0.5 million of cash severance costs.
Material Changes Versus the Prior Comparable Period
- Six-month operating expenses increased by $14.0 million, or approximately 343%, primarily because three Phase 2b trials were underway compared with limited clinical activity in the prior-year period.
- Six-month net loss increased by $14.5 million to $18.0 million.
- Research and development expense increased by $9.2 million, while general and administrative expense increased by $4.8 million.
- Interest income declined to $25,000 from $576,000 because the prior-year amount included non-cash activity related to convertible notes and an embedded conversion derivative.
- In March 2017, the company issued 1,324,256 common shares and warrants to purchase 993,204 additional shares in a private placement. Gross proceeds were approximately $12.5 million and net proceeds were approximately $11.3 million.
- Shares outstanding increased to 10.6 million at June 30, 2017 from 9.3 million at December 31, 2016, excluding potential dilution from approximately 2.4 million stock options and 993,204 warrants.
- The former chief executive officer departed in May 2017; Steven Gullans became interim president and chief executive officer.
Guidance, Outlook, Risks and Unusual Items
Management expects expenses and losses to increase as clinical trials advance, regulatory work and manufacturing activities expand, intellectual property is maintained, personnel are added, and public-company infrastructure develops. The company does not expect revenue unless gemcabene receives regulatory approval and is successfully commercialized.
On July 24, 2017, after the reporting date, the company entered into a Silicon Valley Bank term loan facility of up to $15.0 million and drew $10.0 million. The loan matures February 1, 2021, bears interest at a floating rate based on the prime rate, and initially requires interest-only payments through August 1, 2018. The loan is secured by substantially all assets other than intellectual property and contains restrictive covenants, milestone requirements, final-payment and contingent success fees.
If a positive clinical trial event does not occur by March 31, 2018, the company must either maintain cash collateral equal to at least 50% of amounts owed or prepay the loan. If the required pre-clinical event does not occur by July 31, 2018, the cash-collateral requirement increases to at least 100% of amounts owed or the loan must be prepaid.
Key risks include clinical-trial failure or delays, a partial clinical hold affecting trials longer than six months, inability to obtain regulatory approval, inability to raise additional capital, dilution from future financings, restrictive debt covenants, potential acceleration of the bank loan, and the possibility that the company will never generate revenue or achieve profitability. The Pfizer license includes potential milestone payments of up to $37 million and royalties on future sales; no milestone or royalty liabilities were recorded at June 30, 2017.
Management stated that disclosure controls were effective as of June 30, 2017 and that there were no material changes in internal control over financial reporting during the quarter.
Investor Verification Points
- Verify whether the intended issuer is Gemphire Therapeutics Inc. rather than Metavia Inc.
- Verify COBALT-1 and subsequent ROYAL-1 and INDIGO-1 clinical results, including the impact of any FDA clinical hold.
- Assess cash runway using the $22.5 million June 30 cash balance, $12.8 million six-month operating cash burn, and the subsequent $10.0 million bank borrowing.
- Review the Silicon Valley Bank loan’s milestone triggers, collateral requirements, covenants, fees and potential prepayment obligations.
- Evaluate dilution from 993,204 warrants, approximately 2.4 million options, and potential future equity financings.
- Review the former chief executive officer’s separation terms and the $2.1 million accelerated option expense.
- Confirm Pfizer license obligations, termination provisions and future milestone and royalty exposure.