Business Context and Reporting Period
Prothena Corporation plc is an Ireland-based clinical-stage biotechnology company developing antibody therapies for protein-misfolding and cell-adhesion diseases, including NEOD001, PRX002 and PRX003. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, with comparable periods ended September 30, 2013.
At September 30, 2014, Prothena had 27.4 million ordinary shares outstanding. Its principal development activities included Phase 1 programs for NEOD001 and PRX002; a Phase 1 PRX002 study in Parkinson’s disease patients began in July 2014.
Financial Performance and Position
| Metric | Three months ended September 30, 2014 | Three months ended September 30, 2013 | Nine months ended September 30, 2014 | Nine months ended September 30, 2013 |
|---|---|---|---|---|
| Total revenue | $1.5 million | $0.2 million | $48.8 million | $0.5 million |
| Operating expenses | $14.6 million | $9.7 million | $42.4 million | $30.2 million |
| Income (loss) from operations | $(13.1) million | $(9.6) million | $6.5 million | $(29.7) million |
| Net income (loss) | $(13.2) million | $(9.7) million | $6.0 million | $(29.9) million |
| Basic earnings (loss) per share | $(0.48) | $(0.55) | $0.25 | $(1.69) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $11.8 million | $(22.3) million |
- Third-quarter collaboration revenue was $1.3 million, consisting primarily of Roche development-cost reimbursements and research-service reimbursements. Related-party revenue from Elan was $0.1 million.
- Nine-month collaboration revenue included Roche’s $30.0 million upfront payment, a $15.0 million clinical milestone payment, $4.5 million of development-cost reimbursements and $1.1 million of research-service reimbursements. Revenue recognition allocated portions of the milestone and reimbursements to collaboration revenue and R&D expense offsets.
- R&D expense increased 64% in the quarter and 39% year to date, reflecting higher clinical development, manufacturing, personnel and share-based compensation costs. G&A expense increased 25% in the quarter and 44% year to date.
- The nine-month profit was primarily driven by Roche payments and is not indicative of recurring profitability. Management expects substantial losses for the foreseeable future.
- Cash and cash equivalents were $306.2 million at September 30, 2014, compared with $176.7 million at December 31, 2013. Working capital was $298.8 million, compared with $170.8 million at year-end.
- Cash flow included $118.1 million from financing activities, principally $117.4 million of net proceeds from the June and July 2014 equity offering. Investing cash use was $0.5 million.
- The filing shows no debt financing or outstanding senior debt. Total liabilities were $12.0 million, including $4.6 million of accrued R&D and $2.0 million of deferred rent.
- Share-based compensation was $4.2 million for the first nine months, with approximately $17.4 million of unearned compensation expected to be expensed through 2017.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially because the Roche license became effective in January 2014 and generated upfront and milestone payments; 2013 had no collaboration revenue.
- Despite higher operating expenses, nine-month operating results improved from a $29.7 million loss to $6.5 million of income, and net results improved from a $29.9 million loss to $6.0 million of income.
- Quarterly results remained loss-making as development spending exceeded current-period revenue.
- Operating cash flow improved from $22.3 million used in the first nine months of 2013 to $11.8 million provided in 2014, primarily due to Roche receipts.
- Equity issuance increased shares outstanding from 21.9 million at December 31, 2013 to 27.4 million at September 30, 2014 and generated approximately $117.4 million of net proceeds.
- Related-party revenue from Elan declined 19% year to date because the scope of R&D services decreased. The Transitional Services Agreement expired December 31, 2013.
Guidance, Outlook, Risks and Unusual Items
- Management believes cash and cash equivalents are sufficient to meet obligations for at least the next twelve months, but expects to require additional capital to continue development. Future financing could be dilutive or unavailable on acceptable terms.
- Under the Roche agreement, Roche funds research activities, while Prothena generally bears 30% of U.S. development and commercialization costs for PRX002 when it participates in profit and loss sharing. Prothena may opt out in exchange for specified milestones and royalties.
- Roche may owe up to $380.0 million in development, regulatory and first-commercial-sale milestones, up to an additional $175.0 million in ex-U.S. commercial milestones, and tiered royalties. These payments are contingent and are not guaranteed.
- Roche may terminate the agreement at will after the first anniversary, subject to notice requirements, before or after first commercial sale. The collaboration is also exposed to development, regulatory, manufacturing and commercialization risks.
- NEOD001 interim Phase 1 findings supported management’s planned advancement toward a Phase 2/3 study, but the filing does not provide definitive efficacy or regulatory outcomes.
- Principal risks include clinical-trial failure or delay, regulatory nonapproval, uncertain patent protection, dependence on Roche and third-party clinical research organizations, reliance on Boehringer Ingelheim for clinical supplies, manufacturing limitations, competition, reimbursement uncertainty and the need for additional financing.
- Contractual obligations totaled $16.9 million, including $12.5 million of operating leases, $3.2 million of purchase obligations and $1.2 million under license agreements. Future Roche cost-sharing obligations were excluded because the amounts were not determinable.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Management concluded disclosure controls were effective and identified no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the allocation and sustainability of Roche-related revenue, particularly the one-time $30.0 million upfront payment and $15.0 million clinical milestone.
- Track cash burn excluding one-time collaboration receipts and assess the timing and terms of any future financing.
- Monitor NEOD001 and PRX002 clinical-trial enrollment, safety, efficacy and progression into later-stage studies.
- Verify Prothena’s future U.S. cost-sharing obligations with Roche and any decision to opt in or opt out of profit and loss sharing.
- Assess Roche’s continued commitment, termination rights and execution of development, manufacturing and commercialization responsibilities.
- Review reliance on Boehringer Ingelheim and other third parties for clinical supply and trial execution.
- Consider dilution from the 2014 equity offering, outstanding options and potential future equity financing.