Aquestive Therapeutics, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Aquestive is a specialty pharmaceutical company developing and commercializing orally administered film products using its PharmFilm technology. Its portfolio includes partnered products, proprietary products such as Sympazan, and late-stage candidates including Libervant and Exservan. The filing covers the unaudited three- and six-month periods ended June 30, 2019, compared with the corresponding 2018 periods.
Revenue remains highly concentrated in Indivior, which represented approximately 86% of six-month 2019 revenue and approximately 74% of gross accounts receivable. Sympazan, the Company’s first proprietary product, was launched in December 2018.
Financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $11.1 million | $13.9 million | $23.8 million | $37.3 million |
| Loss from operations | $(18.7) million | $(32.7) million | $(31.8) million | $(27.4) million |
| Net loss | $(20.5) million | $(36.5) million | $(35.2) million | $(32.4) million |
| Net loss per share | $(0.82) | $(1.90) | $(1.41) | $(1.89) |
| Operating cash flow | Not separately presented for the quarter | $(34.8) million | $1.3 million |
Q2 net margin was approximately negative 184%; six-month net margin was approximately negative 148%. Q2 operating margin was approximately negative 168%; six-month operating margin was approximately negative 134%.
- Q2 revenue declined 20%, while six-month revenue declined 36% year over year.
- Q2 manufacture and supply revenue increased 3% to $8.9 million, but six-month manufacture and supply revenue fell 23% to $15.6 million due primarily to lower Suboxone production volume.
- Q2 license and royalty revenue fell 91% to $0.4 million; six-month license and royalty revenue fell 64% to $5.0 million. Certain Indivior license fees were suspended following at-risk generic launches and pending related litigation.
- Proprietary product sales were $0.8 million in Q2 and $1.4 million for the six-month period, entirely reflecting Sympazan sales.
- Q2 selling, general and administrative expense declined 52% to $16.2 million, and six-month expense declined 17% to $34.2 million, primarily because 2018 included substantial one-time performance-unit compensation expense. The 2019 periods included increased commercialization, legal and public-company costs.
- Research and development expense was $8.2 million in Q2 and $12.5 million for the six-month period.
- Share-based compensation was $3.3 million for the first six months of 2019, compared with $27.3 million in the prior-year period.
Liquidity, cash flow and debt
- Cash and cash equivalents were $22.2 million at June 30, 2019, compared with $60.6 million at December 31, 2018. Working capital, including cash, was $14.4 million.
- Total liabilities were $75.1 million and shareholders’ deficit was $24.7 million at June 30, 2019.
- Six-month cash use included $34.8 million from operating activities, $0.5 million from investing activities and $3.1 million from financing activities, resulting in a $38.4 million decrease in cash.
- On July 15, 2019, after quarter-end, the Company issued $70.0 million of 12.5% senior secured notes due 2025 and received net proceeds of approximately $67.0 million. It used approximately $52.1 million to repay the Perceptive credit facility and expects to use the remaining approximately $14.9 million for commercialization, pipeline development and general corporate purposes.
- The new notes are secured by substantially all Company assets and are accompanied by warrants to purchase up to 2.0 million shares at $4.25 per share. The indenture permits potential additional notes of up to $30.0 million subject to conditions tied primarily to Libervant development and regulatory milestones.
Material changes and outlook
- The Company adopted ASC 606 on January 1, 2019 using the modified retrospective method, reducing opening accumulated deficit by $2.8 million, primarily due to deferral of previously recognized licensing and milestone revenue.
- Libervant enrollment in a required single-dose crossover study was completed in May 2019. A rolling NDA submission began in Q2, and the study was completed after quarter-end; the Company was evaluating the data at the filing date.
- Exservan’s NDA was submitted in Q1 2019, with an FDA PDUFA goal date of November 30, 2019.
- Management expects continued net losses and negative operating cash flow as it funds Sympazan commercialization, Libervant development, other pipeline programs and public-company costs.
- Management stated that cash on hand, anticipated product and licensing revenue, and the July 2019 refinancing proceeds are expected to fund requirements for at least the next twelve months. This expectation depends on continued revenue, cost reductions, regulatory progress, covenant compliance and potential future financing or royalty monetization.
Risks, contingencies and unusual items
- Indivior concentration creates significant customer and liquidity risk. Indivior’s Suboxone business is subject to generic competition, regulatory matters and litigation, including a U.S. government investigation and related proceedings.
- The Federal Circuit affirmed on July 12, 2019 that Actavis infringed a Suboxone patent and could not enter the market until 2024, while also affirming non-infringement findings for DRL and Alvogen under a different claim construction. Additional patent cases remain pending.
- A state and District of Columbia antitrust action involving Indivior and Aquestive remains unresolved. Management could not estimate the potential loss or outcome.
- Revenue and license payments are volatile and depend on product volumes, milestones, royalties, regulatory events and litigation outcomes.
- The new senior secured notes carry a high fixed interest rate, impose restrictive covenants and are secured by substantially all assets. Additional debt financing and royalty monetization are not assured.
- Potential dilution exists from the two million noteholder warrants, outstanding options and restricted stock units.
- No income tax benefit was recorded because the Company maintains a full valuation allowance against deferred tax assets.
Investor verification points
- Verify the sustainability of Suboxone manufacturing revenue and the effect of at-risk generic competition on volumes, royalties and Indivior payments.
- Track Sympazan prescription growth, net sales, commercial spending and payer access.
- Confirm Libervant NDA timing, FDA interactions and approval prospects, and monitor Exservan’s November 30, 2019 PDUFA date.
- Review cash burn, covenant compliance, interest and principal obligations under the 12.5% senior secured notes.
- Monitor the Indivior-related antitrust and patent litigation and any resulting impact on license fees, royalties or customer relationships.
- Assess whether future revenue, cost reductions, additional note capacity or royalty monetization are sufficient to offset continuing operating losses and negative cash flow.