Sol-Gel Technologies Ltd. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a quarterly filing. Financial statements are audited and prepared under U.S. GAAP; the auditor issued an unqualified opinion.
Business context
Sol-Gel is an Israeli clinical-stage dermatology company developing branded and generic topical treatments. Its branded candidates use a silica-based microencapsulation platform intended to improve drug stability and skin tolerability. The company had no approved products and no meaningful product-sales revenue in 2017.
- TWIN: Phase II acne trial showed statistically significant results versus vehicle; two Phase III trials were planned for the second half of 2018, subject to FDA discussions.
- VERED: Phase II results supported the 5% formulation for subtype II rosacea; two Phase III trials were planned for the first half of 2018.
- SIRS-T: Encapsulated tretinoin candidate for acne; Phase III was planned for 2020, relying in part on TWIN data and subject to FDA feedback.
- Generics: Six topical candidates were in development. Perrigo’s ivermectin cream, 1% ANDA received tentative FDA approval in January 2018, but final approval was subject to a 30-month stay following patent litigation.
Financial performance and liquidity
Amounts below are U.S. dollars; income statement and cash-flow amounts are in millions unless stated otherwise.
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Revenue | $0.174 | $0 | Royalties under a legacy collaboration; not product sales. |
| Research and development expense | $25.805 | $17.023 | Up $8.782 million, approximately 52%. |
| General and administrative expense | $6.002 | $3.733 | Up $2.269 million, approximately 61%. |
| Operating loss | $31.633 | $20.756 | Loss widened approximately 52%. |
| Net loss | $31.568 | $20.771 | Loss widened approximately 52%; 2017 loss per share was $5.02 versus $3.30. |
| Net cash used in operating activities | $24.089 | $18.495 | Operating cash use increased. |
| Net cash used in investing activities | $5.938 | $0.391 | Included $4.013 million of deposits and $1.925 million of property and equipment purchases. |
| Net cash provided by financing activities | $28.000 | $20.000 | Shareholder loans. |
- At December 31, 2017, cash and cash equivalents were $5.024 million and a bank deposit was $4.000 million. Total assets were $15.315 million; total liabilities were $68.014 million, including $65.338 million of current loans from the controlling shareholder. Capital deficiency was $52.699 million and accumulated deficit was $95.261 million.
- The shareholder loans were unsecured, non-interest-bearing and had no stated repayment date. They converted into 5,444,825 ordinary shares immediately before the subsequent IPO.
- In February 2018, the IPO sold 7,187,500 shares at $12 each. The filing reports approximately $80.2 million of net proceeds after underwriting discounts and commissions but before other offering expenses; elsewhere it reports approximately $78.3 million after total offering expenses of approximately $7.9 million. The company stated it had not used IPO proceeds as of March 24, 2018.
- Management said year-end resources plus IPO proceeds were expected to fund operations for at least 12 months and complete planned Phase III programs for TWIN and VERED. It also cautioned that assumptions could prove wrong and that additional financing would be required to pursue broader objectives.
- No gross margin is reported because the company had no commercial product sales. The filing reports no off-balance-sheet arrangements. Contractual operating lease obligations totaled $1.437 million at year-end.
Material changes and unusual items
- R&D spending rose substantially, with the filing attributing the 2017 increase to payroll and share-based compensation, manufacturing expenses, and a $6.232 million in-process R&D product candidate acquired from an affiliate. Clinical-trial expense decreased by $3.1 million year over year.
- Share-based compensation expense increased to $3.974 million from $0.952 million in 2016. G&A growth also reflected higher professional fees and share-based compensation.
- The company paid $1.0 million in 2017 under a previously established employee and executive milestone-bonus arrangement.
- The 2018 IPO and conversion of shareholder debt occurred after the reporting date and materially changed the company’s capitalization and liquidity; they are not reflected in the December 31, 2017 balance sheet.
Outlook, risks and contingencies
- Management expected substantial continuing losses and rising R&D and public-company expenses; timing of approvals, commercialization and profitability remained uncertain. No revenue or earnings guidance was provided.
- Key execution risks include clinical-trial outcomes and timing, FDA acceptance of development plans and the 505(b)(2) pathway, patient enrollment, safety and tolerability, manufacturing scale-up, third-party collaborators and suppliers, and ability to commercialize products or secure partners.
- The company warned it may need additional capital; equity financing could dilute shareholders, debt could restrict operations, and collaborations could require granting away valuable rights.
- Sol-Gel relied on third-party manufacturers and clinical research organizations, had no sales organization, and did not maintain product-liability insurance at the time described.
- Patent disputes and exclusivity may delay generic or 505(b)(2) approvals. In particular, litigation connected with Perrigo’s ivermectin ANDA triggered a 30-month stay.
- Additional exposures include Israeli political and security conditions, NIS exchange-rate fluctuations (the company did not hedge), Innovation Authority restrictions on certain funded know-how and manufacturing, and uncertainty over U.S. healthcare coverage and pricing.
- The company expected to be a passive foreign investment company (PFIC) for U.S. tax purposes at least until it generated substantial active revenue. It also relied on controlled-company and foreign-private-issuer governance exemptions.
Most important facts for investors to verify
- Whether TWIN and VERED Phase III trials began on schedule, and their enrollment, safety and efficacy results.
- FDA requirements and the regulatory path for SIRS-T, including whether TWIN Phase II data support its development plan.
- The status and expected resolution of patent litigation and the 30-month stay affecting the ivermectin ANDA.
- Actual post-IPO cash, cash burn and runway, including reconciliation of the filing’s $80.2 million and $78.3 million IPO net-proceeds figures.
- Whether the shareholding, related-party arrangements and governance exemptions create conflicts or affect minority shareholders.
- Whether the company’s PFIC status applies for each relevant tax year and the resulting tax and reporting consequences for U.S. investors.