Lineage Cell Therapeutics, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unless otherwise stated, amounts below are in U.S. dollars; financial figures are rounded to millions.
Business context
Lineage is a clinical-stage biotechnology company developing allogeneic cell therapies. Its five disclosed programs include OpRegen, OPC1 and VAC in clinical testing, and ANP1 and PNC1 in preclinical development. Roche holds exclusive worldwide rights to develop and commercialize OpRegen and related retinal pigment epithelium therapies under a 2021 collaboration agreement.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $3.0m | $2.3m | $12.8m | $3.2m |
| Gross profit | $2.8m | $1.3m | $12.2m | $2.0m |
| Operating expenses | $8.0m | $8.1m | $28.0m | $22.9m |
| Operating loss | $5.3m | $6.8m | $15.9m | $21.0m |
| Net loss | $6.1m | $7.8m | $20.0m | $14.1m |
| Net loss per share | $0.04 | $0.05 | $0.12 | $0.09 |
Gross margin was approximately 92% for Q3 2022 and 95% for the nine-month period; these high rates reflect the company’s revenue mix and relatively low cost of sales. Q3 revenue increased 32%, while nine-month revenue rose 303%, mainly from recognizing Roche upfront-fee revenue. That recognition was not a new cash receipt in 2022: Roche paid the $50.0m upfront fee in January. Collaboration revenue recognized was $2.6m in Q3 and $11.6m year to date. Royalties fell to $0.4m in Q3 and $1.2m year to date, from $1.9m and $2.4m, respectively.
At September 30, Lineage reported $66.4m in cash, cash equivalents and marketable securities and $68.5m in current assets, against $22.7m of current liabilities. Total liabilities were $53.6m and shareholders’ equity was $77.6m. The balance sheet shows lease obligations, including $2.8m of operating lease liabilities; no conventional borrowing balance is presented. The company reported $9.4m of operating cash flow for the first nine months, compared with $17.7m used in the prior-year period. Investing activities used $41.1m, primarily to buy U.S. Treasury securities; financing activities provided $1.5m. Cash, cash equivalents and restricted cash declined $31.0m to $25.3m, while much of the cash was shifted into marketable securities.
Material changes and unusual items
- Q3 collaboration revenue rose as Roche upfront consideration was recognized over time; the company attributes the period-to-period change primarily to progress under the agreement.
- Q3 royalties declined significantly because the prior-year quarter included approximately $1.8m of royalty revenue based on updated customer information, which Lineage did not expect to recur.
- Nine-month G&A expense increased $4.4m, principally including a $3.5m accrual for the proposed Asterias merger litigation settlement, higher salaries and stock-based compensation. Q3 G&A decreased year over year, mainly on lower legal and litigation costs.
- Other income and expense was less favorable year to date than in 2021: the prior-year period included gains from OncoCyte share sales and debt extinguishment. In 2022, Lineage recorded a $1.7m unrealized loss on marketable equity securities and $2.6m of other net expenses, principally related to foreign currency remeasurement.
- Cash from operations included substantial working-capital effects associated with the Roche payment and related payments to the Israel Innovation Authority and Hadasit. The positive operating cash flow should not be read as recurring operating profitability.
Outlook, risks and contingencies
Management states that available cash, cash equivalents and marketable securities, together with projected cash flows, are expected to fund planned operations for at least twelve months from issuance of the financial statements. It also expects continued losses for at least several years and says significant additional capital will be needed over time. The ATM program had $63.8m available for potential share sales at quarter-end; no ATM shares were sold in Q3.
Roche may owe up to $620m in additional development, regulatory and commercialization milestones, plus tiered double-digit royalties, but these payments are contingent and subject to agreement terms. Lineage also has obligations to the IIA and Hadasit tied to Roche-related receipts. The IIA redemption-fee cap was approximately $90.9m at quarter-end; the amount and timing of future payments depend on future receipts and contractual terms.
On October 26, 2022, the parties executed a settlement agreement for the Asterias merger litigation, subject to court approval. The $10.65m settlement is expected to be funded approximately $7.12m by insurers and $3.53m by Lineage; Lineage may satisfy some or all of its share in cash, common shares, or both. The company and other defendants deny liability, and approval is not assured.
Key risks include clinical and regulatory uncertainty, reliance on partners and contingent collaboration payments, the need for future financing and resulting potential dilution, volatility in the value of OncoCyte shares, and possible effects of inflation, rising interest rates, supply-chain disruption, COVID-19 and the war in Ukraine. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Cash runway assumptions and the extent to which operating cash flow depended on Roche-related working-capital timing rather than recurring operations.
- OpRegen development progress, Roche’s ongoing responsibilities and discretion to terminate, and the conditions attached to future milestones and royalties.
- Final court approval and payment mechanics for the $10.65m litigation settlement, including any share issuance by Lineage.
- Potential dilution from the ATM program, equity compensation and any future capital raises.
- Exposure to OncoCyte share-price changes and the related effects on reported earnings, taxes and liquidity.