AC Immune SA annual report, Q4 FY2018

Business context and reporting period

AC Immune SA’s Form 20-F reports the fiscal year ended December 31, 2018; it is an annual filing, not a standalone Q4 report. The company is a Swiss clinical-stage biopharmaceutical business developing therapies and diagnostic candidates for neurodegenerative diseases, principally Alzheimer’s disease, using its SupraAntigen and Morphomer platforms. Financial statements are prepared under IFRS in Swiss francs (CHF). AC Immune had no approved products and no product-sale revenue.

Financial performance and position

Revenue fell CHF 13.1 million, mainly because 2017 included a CHF 14 million Genentech milestone for starting a Phase 2 anti-Tau study and a CHF 1.1 million Life Molecular milestone; no milestone revenue was recognized in 2018. Biogen and Janssen generated 56% and 30% of 2018 contract revenue, respectively. Revenue is therefore partnership- and milestone-dependent, not recurring product revenue.

R&D expense increased CHF 11.6 million, reflecting pipeline investment, including ACI-35, ACI-24 and discovery programs, as well as increased staffing. G&A expense increased CHF 2.3 million. The net loss nearly doubled year over year. Net finance expense was CHF 1.4 million, compared with CHF 3.9 million in 2017; foreign-exchange losses narrowed. No income tax expense was recorded.

For Q4 2018, unaudited revenue was CHF 1.4 million and net loss was CHF 14.7 million, versus Q4 2017 revenue of CHF 16.4 million and net income of CHF 4.2 million. The prior-year quarter included significant milestone revenue.

Operating cash outflow was CHF 44.1 million. Financing activities provided CHF 109.4 million, principally from three 2018 share offerings, which raised approximately CHF 109.5 million net. Investing cash outflow was CHF 32.0 million, including CHF 30 million placed in short-term fixed-term deposits; it should not be read as equivalent to operating burn. Year-end cash plus short-term financial assets totaled CHF 186.5 million. Current assets were CHF 192.9 million versus current liabilities of CHF 13.1 million. The filing reports no material off-balance-sheet arrangements.

Material changes versus the prior comparable period

• Contract revenue declined about 64% while R&D expense rose about 36%; net loss increased from CHF 26.4 million to CHF 51.0 million.
• Operating cash use approximately doubled, while the July 2018 offerings materially strengthened liquidity and increased shares outstanding to 67.6 million at year-end.
• In January 2019, Roche discontinued the CREAD 1 and CREAD 2 Phase 3 crenezumab trials after an interim review concluded the drug was unlikely to meet the primary endpoint. The decision was not attributed to safety. Crenezumab’s preventive trial in Colombia continued.
• The Lilly Tau Morphomer agreement was signed in December 2018 and became effective January 23, 2019. The company received CHF 80 million upfront in February 2019; this was not 2018 revenue or year-end cash. Lilly also provided USD 50 million (CHF 50.3 million) under a convertible note, effective in January 2019, convertible at USD 13.83 per share into approximately 3.6 million shares.

Outlook, management commentary, and risks

Management expected existing year-end 2018 capital resources, excluding potential milestone payments, to fund planned operations through at least Q3 2023. This is an estimate based on assumptions and may not hold if costs, study timelines or plans change. The company expects continued losses and higher R&D spending; it does not expect product-sale revenue in the near term and may need additional funding for development or commercialization.

Pipeline updates included ACI-24 in a Phase 2 Alzheimer’s study and an ongoing Phase 1b Down syndrome study; a planned next-stage ACI-35 study; Genentech’s Phase 2 anti-Tau antibody program; and PI-2620 Tau-PET imaging development with Life Molecular. AC Immune and Biogen subsequently decided not to extend their collaboration beyond April 2019. The Lilly agreement could generate up to approximately CHF 1.8 billion in conditional milestones, plus royalties, but these amounts are contingent and are not assured revenue.

Principal risks include clinical failure or delay, dependence on partners that control development of licensed programs, the discontinuation risk illustrated by crenezumab, competition, intellectual-property challenges, reliance on external manufacturers and clinical research organizations, foreign-exchange exposure, and the need for future capital. The company reported unhedged currency exposure; a hypothetical 10% CHF move against the USD and EUR would have changed 2018 net loss by approximately CHF 3.0 million. Management said disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal-control effectiveness because of the company’s emerging-growth-company exemption.

Most important facts for investors to verify

• Confirm the latest status and results of the Colombia crenezumab prevention trial and the implications of the halted CREAD studies.
• Track actual operating cash burn, study commitments and whether the stated runway remains valid; distinguish cash, short-term deposits and post-year-end Lilly proceeds.
• Review the Lilly note’s conversion, resulting dilution, and the conditions, timing and termination provisions tied to Lilly milestones and royalties.
• Monitor enrollment, safety, efficacy and funding responsibilities across AC Immune’s wholly owned and partnered clinical programs.
• Assess the quality and timing of collaboration revenue: in 2018, no royalties were recognized, and revenue was concentrated in Biogen and Janssen.
• Check the audited IFRS statements and notes for contractual research commitments, pension liabilities, tax-loss carryforwards and foreign-exchange sensitivity.