Aclaris Therapeutics, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2018, with audited comparative results for 2017 and 2016. Aclaris is a physician-led biopharmaceutical company focused on dermatology and immuno-inflammatory diseases. It launched ESKATA for raised seborrheic keratosis in the United States in May 2018 and acquired worldwide rights to RHOFADE for rosacea-associated facial erythema from Allergan in November 2018. The company also operates a contract research business through Aclaris Life Sciences.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $10.1 million | $1.7 million | +$8.4 million |
| Product sales, net | $3.9 million | $0 | +$3.9 million |
| Contract research revenue | $4.7 million | $1.7 million | +$3.0 million |
| Other revenue | $1.5 million | $0 | +$1.5 million |
| Gross profit | $3.2 million | $0.5 million | +$2.8 million |
| Gross margin | Approximately 32% | Approximately 28% | Improved |
| Operating expenses | $138.7 million | $72.9 million | +$65.8 million |
| Loss from operations | $(135.4) million | $(72.4) million | Worsened by $63.0 million |
| Net loss | $(132.7) million | $(68.5) million | Worsened by $64.2 million |
| Net loss per share | $(4.03) | $(2.44) | Worsened |
| Cash used in operating activities | $(100.8) million | $(54.7) million | Use increased by $46.1 million |
Product sales included $2.8 million from ESKATA and $1.1 million from RHOFADE. Cost of revenue was $6.9 million and included $1.1 million of non-cash ESKATA inventory write-downs, $0.6 million of RHOFADE intellectual-property amortization, and $1.0 million of RHOFADE-related product costs.
Research and development expense increased to $63.0 million from $39.8 million, driven by Phase 3 development of A-101 45% Topical Solution for common warts, continued Phase 2 development of ATI-501 and ATI-502, and expanded discovery activities. Sales and marketing expense increased to $48.0 million from $13.8 million as the company launched ESKATA and built its commercial organization. General and administrative expense increased to $27.6 million from $19.3 million. Stock-based compensation expense was $20.1 million.
Liquidity, cash flow and debt
- Cash, cash equivalents and marketable securities totaled $168.0 million at December 31, 2018, including $57.0 million of cash and cash equivalents and $111.0 million of current marketable securities.
- Financing activities provided $128.3 million, including $100.2 million of net proceeds from an October 2018 public offering and $29.9 million of net debt proceeds.
- Investing activities provided $9.4 million, after $67.1 million spent to acquire RHOFADE and net proceeds from marketable-security transactions.
- The company borrowed $30.0 million under an Oxford Finance facility, with up to an additional $35.0 million available through March 31, 2019. Interest is the greater of 8.35% or 30-day U.S. LIBOR plus 6.25%; principal and interest payments begin in November 2021 and mature in October 2023.
- Debt is secured by substantially all assets other than intellectual property and includes minimum-revenue covenants and other restrictive covenants. The company stated that existing liquidity was expected to fund operations and capital requirements for more than 12 months from the filing date, but additional capital will be required for planned development and commercialization activities.
Material changes versus the prior comparable period
- 2018 was the first year with product sales, following the ESKATA launch and the RHOFADE acquisition.
- Revenue increased substantially, but commercialization and research investment caused operating expenses to rise 90% and net loss to increase 94%.
- RHOFADE added $67.1 million of acquired assets, including $66.2 million of product-rights intangible assets, and introduced royalties ranging from mid-single-digit to mid-teen percentages of net sales.
- The company issued approximately 9.9 million shares in the October 2018 public offering and 253,208 shares in connection with a Confluence development milestone, increasing common shares outstanding to 41.2 million at year-end from 30.9 million.
- Operating cash burn increased to $100.8 million from $54.7 million, reflecting higher commercial, clinical and infrastructure spending.
Guidance, outlook, commentary and risks
- Management expects continued substantial losses for the next several years while commercializing ESKATA and RHOFADE and advancing clinical and preclinical programs.
- Phase 3 THWART-1 and THWART-2 trials of A-101 45% Topical Solution were initiated in September 2018, with results expected in the second half of 2019. If results are positive, management expected to submit an NDA in the first half of 2020.
- Preliminary results for ATI-501 and ATI-502 programs were expected during 2019, including studies in alopecia areata, vitiligo, androgenetic alopecia and atopic dermatitis.
- The company expected to submit an IND for ATI-450 in mid-2019 and an IND for ATI-1777 by the end of the first half of 2020, subject to development progress and regulatory review.
- ESKATA is primarily a cash-pay aesthetic procedure because third-party payors generally do not reimburse treatment of seborrheic keratosis. Commercial performance therefore depends heavily on patient willingness to pay and physician adoption.
- RHOFADE depends more heavily on continued third-party-payor coverage, reimbursement and patient-assistance programs. Revenue estimates are exposed to rebates, discounts, chargebacks, co-pay assistance and product-return assumptions.
- Key risks include continued operating losses and cash burn, potential need for additional financing and dilution, clinical-trial failure or delay, regulatory uncertainty, competition from MIRVASO and other therapies, reliance on third-party manufacturers and CROs, patent challenges, supply disruption, and restrictive debt covenants.
- The FDA had granted ESKATA three years of new-product exclusivity through December 14, 2020, rather than the five-year NCE exclusivity sought by Aclaris. The company had appealed the FDA determination.
- The filing reports no material legal proceedings and no off-balance-sheet arrangements. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018.
Most important facts for investors to verify
- Whether ESKATA and RHOFADE sales grow sufficiently to offset commercial infrastructure, royalty, reimbursement and manufacturing costs.
- Cash-burn trends, remaining liquidity, any draw under the additional Oxford facility, and compliance with minimum-revenue and other debt covenants.
- Results and enrollment of the THWART-1 and THWART-2 Phase 3 trials and the timing and outcome of any A-101 NDA submission.
- Clinical efficacy, safety and regulatory progress for ATI-501, ATI-502, ATI-450 and ATI-1777.
- The impact of ESKATA’s three-year exclusivity determination, potential generic or competing products, and the status of the NCE appeal.
- Revenue concentration, including the fact that the top five customers represented 83% of aggregate product-sales and contract-research revenue in 2018.
- Additional milestone and royalty obligations, including up to $75.0 million of remaining contingent consideration to former Confluence equity holders, up to $90.0 million of specified Rigel milestones, and royalties on future product sales.