Orchestra BioMed Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and reporting period
Orchestra BioMed develops procedure-based medical technologies through partnerships with established medical-device companies. Its lead candidates are Virtue SAB for artery disease and BackBeat CNT for hypertension. FreeHold surgical retractors generated the company’s product revenue; partnership revenue came from the Terumo agreement for Virtue SAB.
The company completed its business combination on January 26, 2023 and began Nasdaq trading as OBIO on January 27. It accounts for the transaction as a reverse recapitalization, with Legacy Orchestra treated as the accounting acquirer. Accordingly, prior-period operating results reflect Legacy Orchestra and comparisons span the transaction.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $1.164 million | $0.866 million | Up 34% |
| Operating expenses | $12.709 million | $5.994 million | Up 112% |
| Operating loss | $11.545 million | $5.128 million | Loss increased $6.417 million |
| Net loss | $10.940 million | $5.729 million | Loss increased $5.211 million |
| Net loss per share | $0.40 | $0.62 | Loss per share decreased |
| Operating cash flow | $(14.381) million | $(5.324) million | Cash use increased |
Partnership revenue rose 42% to $1.019 million, primarily from recognizing Terumo upfront consideration over time; product revenue fell 3% to $145,000. Product gross profit was approximately $101,000, or 70% of product revenue. The company remained substantially loss-making, and total revenue does not reflect the cost of its research and development program.
Research and development expense increased 138% to $8.254 million, driven by work advancing Virtue SAB and BackBeat CNT toward planned pivotal studies, higher personnel and stock-based compensation, and increased program and clinical costs. Selling, general and administrative expense increased 78% to $4.411 million, including public-company costs and stock-based compensation.
At March 31, cash and cash equivalents were $18.695 million and marketable securities were $108.438 million, totaling $127.133 million. Current assets were $129.880 million and current liabilities were $12.057 million. The company reported total liabilities of $36.528 million, including $9.527 million of long-term loan payable; the loan’s $10 million principal bears a floating rate of 14.45% at quarter-end and matures in June 2026. The loan is secured by company assets, subject to stated exclusions, and contains restrictive covenants but no financial covenants.
Investing cash outflow of $43.529 million largely reflects purchases of marketable securities, rather than operating investment alone. Financing cash inflow was $56.821 million, primarily net business-combination proceeds. The company received $70 million gross in the transaction and reported $54.302 million of net effect in equity after redemptions and transaction costs.
Material changes and unusual items
- Revenue increased, but the net loss nearly doubled as development spending and public-company costs expanded.
- Q1 2023 included $885,000 of net interest income, compared with $236,000 of net interest expense in Q1 2022, mainly reflecting interest earned on marketable securities.
- The company recorded $1.489 million of stock-based compensation versus $70,000 a year earlier. It reported approximately $11.2 million of total unrecognized stock-based compensation expected to be recognized over a weighted-average period of about three years.
- Outstanding common shares increased from 20.188 million at December 31, 2022 to 31.741 million at March 31, 2023, principally reflecting the business combination and recapitalization.
- After quarter-end, on April 12, 2023, the initial earnout milestone was achieved: participating former Legacy Orchestra stockholders received an aggregate 4 million shares, and 500,000 sponsor shares ceased to be subject to forfeiture. The filing describes a further potential 4 million earnout shares if the higher milestone is achieved.
Outlook, risks and contingencies
Management expected operating expenses, particularly research and development, to increase as the company prepared for and began enrollment in planned pivotal studies for BackBeat CNT and Virtue SAB. Based on current development plans and budgets, management estimated cash and marketable securities would fund operations into 2026. Separately, its going-concern assessment concluded funds available at the financial-statement issuance date were sufficient for at least one year. Both estimates depend on spending, clinical progress and other assumptions; additional financing may be required.
Terumo milestone payments remain a significant uncertainty. Two $5 million time-based milestone target dates had passed without achievement, and the company said it was unlikely to meet remaining time-based milestones representing $25 million under the existing dates. Terumo may terminate the agreement or certain obligations if specified milestones are not achieved. The parties had agreed to negotiate revised dates, but no outcome was assured. Potential Terumo milestones were excluded from the transaction price because achievement was uncertain; no Terumo royalties had been recognized.
The company sponsors the BackBeat CNT pivotal study and bears associated development, clinical and regulatory costs, including reimbursable Medtronic costs. It had incurred approximately $1.3 million of Medtronic-related costs in Q1, with no revenue recognized under that agreement through March 31. More broadly, principal risks include clinical and regulatory uncertainty, single-source and third-party manufacturing and supply dependencies, adverse events, reliance on partners, reimbursement and market-acceptance uncertainty, intellectual-property protection, and the ability to raise capital. Management reported disclosure controls and procedures were effective as of March 31, 2023. The company reported no material legal proceedings.
Important facts for investors to verify
- Whether the Terumo milestone-date negotiations resulted in amended dates, and whether Terumo retains or exercises termination rights.
- Progress, enrollment and costs for the planned Virtue SAB and BackBeat CNT pivotal studies, including required regulatory and manufacturing work.
- Cash use relative to management’s runway estimate, and the timing and terms of any additional financing or debt draws.
- The effect of the April 2023 earnout share issuance and any further potential earnout shares on dilution and ownership.
- Whether single-source suppliers and manufacturing partners can deliver required materials and meet regulatory-quality requirements.