Wave Life Sciences Ltd. — Q2 2016 Form 10-Q
Business context and period: Preclinical biotechnology company developing stereopure nucleic-acid therapeutics. This unaudited report covers the quarter and six months ended June 30, 2016; financial amounts below are in U.S. dollars unless noted.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $0.417 million | $0.126 million | $0.417 million | $0.152 million |
| Research and development expense | $8.401 million | $1.850 million | $13.137 million | $3.457 million |
| General and administrative expense | $3.654 million | $1.905 million | $6.870 million | $3.789 million |
| Total operating expenses | $12.055 million | $3.755 million | $20.007 million | $7.246 million |
| Net loss | $11.565 million | $3.700 million | $19.412 million | $7.165 million |
| Basic and diluted loss per share | $0.51 | $0.40 | $0.88 | $0.82 |
Revenue was collaboration-related; the company reported no product revenue. Gross margin was not separately reported and is not meaningful for the preclinical business described. Six-month operating cash use was $6.746 million, investing cash use was $1.559 million, and financing provided $28.922 million. Cash increased by $20.545 million to $181.765 million at June 30.
At June 30, cash was $181.765 million, restricted cash $1.055 million, total assets $190.338 million, and total current liabilities $8.647 million. Total liabilities were $16.186 million, including $0.109 million of capital-lease obligations and $9.583 million of deferred revenue. The filing reports no conventional borrowings. Accumulated deficit was $54.488 million. Management estimated cash on hand would fund operations and capital expenditures into 2019, subject to assumptions that may prove incorrect. No operating or profit margin guidance was provided.
Material changes and notable items
- Compared with Q2 2015, Q2 2016 revenue increased $0.291 million, while operating expenses rose $8.300 million and net loss widened $7.865 million. For the first half, operating expenses increased $12.761 million and net loss widened $12.247 million.
- R&D spending rose substantially, reflecting preclinical and IND-enabling work for Huntington’s disease programs, work on the DMD Exon 51 program, broader discovery and platform development, and increased staffing and facilities costs. G&A growth included public-company costs and increased headcount.
- In May 2016, Pfizer agreed to collaborate on up to five genetically defined hepatic-target programs over a four-year research term. Wave received $40.0 million: a $10.0 million license-fee payment and $30.0 million for 1,875,000 ordinary shares at $16 per share. Wave recognized $0.417 million of collaboration revenue and reported $9.583 million of deferred revenue at quarter-end.
- Subject to Pfizer option exercises and successful development and commercialization of five potential products, Wave may receive up to $871 million in research, development and commercial milestones, plus tiered royalties up to low double digits. These amounts are contingent, not assured revenue.
- Ordinary shares outstanding increased to 23,432,923 from 21,551,423 at year-end 2015. The filing reported 23,440,423 outstanding as of August 1, 2016.
Outlook, risks and controls
- Management expected to file INDs for Huntington’s disease HTT SNP-1 and HTT SNP-2 in late 2016 and for DMD Exon 51 in mid-2017. It anticipated increasing R&D and public-company expenses; no formal financial guidance was provided.
- Key risks include preclinical and clinical failure, regulatory delays, uncertain intellectual-property protection, competition, dependence on key personnel, and the possibility that additional financing may be unavailable on acceptable terms. Product revenue may not occur for many years, if ever.
- Management stated that cash resources were expected to fund operations into 2019, but noted that the estimate depends on assumptions and funds could be used sooner. Additional financing may be required.
- Disclosure controls were concluded to be ineffective at the reasonable-assurance level because of a material weakness in review and approval controls for manual journal entries and supporting calculations. Remediation efforts included hiring or planning to hire finance personnel and strengthening review and oversight.
- The company reported no material legal proceedings, no material changes to the risk factors in its 2015 Form 10-K, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress toward the stated IND filing timelines and the readiness of the Huntington’s disease and DMD programs.
- Whether Wave meets its Pfizer research obligations, Pfizer’s decisions on program options, and the timing and collectability of any contingent milestones or royalties.
- Actual cash use versus the stated runway estimate, particularly as clinical development and related spending increase.
- Progress and effectiveness of remediation of the material weakness in financial reporting controls.
- The impact of share issuance and equity compensation on future dilution.