Protalix BioTherapeutics, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited financial amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Protalix develops and commercializes recombinant therapeutic proteins using its ProCellEx platform. Its commercial product taliglucerase alfa is sold in Brazil as Uplyso and elsewhere primarily by Pfizer as Elelyso. Key development programs include PRX-102 for Fabry disease (Phase III), alidornase alfa for cystic fibrosis (Phase II study completed), and OPRX-106 for ulcerative colitis (Phase II enrollment initiated).
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $6.36 | $1.77 | $9.25 | $2.45 |
| Gross profit | $0.84 | $0.09 | $1.64 | $0.25 |
| Gross margin | 13.1% | 5.3% | 17.7% | 10.2% |
| Net R&D expense | $8.83 | $7.82 | $13.46 | $13.84 |
| SG&A expense | $2.81 | $2.21 | $5.35 | $4.20 |
| Operating loss | $10.81 | $9.93 | $17.17 | $17.80 |
| Net income (loss) | $0.45 | $(10.85) | $(58.70) | $(19.45) |
Revenue growth was primarily attributed to increased drug-substance sales to Pfizer and drug-product sales to Brazil. Higher sales-related production costs also increased cost of revenue. First-half R&D expense declined mainly because of lower development-material costs, while SG&A increased mainly due to sales expenses.
Q2 net income included a $14.3 million fair-value gain on the embedded derivative in the 7.5% convertible notes; the six-month result included a $38.1 million noncash fair-value charge. These items make the reported net results less representative of underlying operating performance. Basic EPS was $0.00 for Q2 and $(0.47) for the first half; diluted Q2 EPS was $(0.06).
First-half operating cash use was $17.0 million, compared with $21.3 million in 2016. Investing cash use was $1.0 million; financing cash use was $11.0 million, primarily for cash settlements related to note conversions. Cash and cash equivalents were $34.5 million at June 30, down from $63.3 million at December 31, 2016.
At June 30, current assets were $48.9 million and current liabilities $19.1 million, implying working capital of approximately $29.8 million. Total liabilities were $79.7 million and capital deficiency was $20.7 million. Long-term convertible notes were carried at $53.6 million; the filing reports remaining principal of approximately $14.9 million on 4.5% notes due 2018 and $51.9 million on 7.5% notes due 2021. Management stated that available cash was expected to support planned activities for at least 12 months, while noting that additional financing could be needed.
Material changes, outlook and risks
- Shareholders approved issuing shares beyond the 19.9% limit for settling conversion requests and interest on the 7.5% notes. The embedded derivative was consequently reclassified to equity, with the related fair-value changes contributing materially to reported financial results. During the first half, holders converted about $10.8 million principal into 4.95 million shares, alongside approximately $11 million in cash payments.
- The Brazilian Ministry of Health order through Fiocruz totals approximately $24.3 million for 2017; shipments began in June and were expected to increase through year-end. However, Fiocruz’s purchases had been below contractual milestones, giving Protalix a termination right. The company was discussing compliance with Fiocruz and continued supplying Uplyso.
- After quarter-end, Protalix agreed to issue $10 million of 7.5% convertible notes due 2021 and exchange $9 million principal of 4.5% notes due 2018 for $8.55 million of 4.5% senior convertible notes due 2022. The filing states that these transactions were completed July 25, 2017.
- Management expects R&D to remain its primary expense and anticipates significant spending on clinical programs. No specific financial forecast or revenue guidance was provided.
- Key disclosed risks include uncertain Fiocruz purchase performance and Brazilian commercialization, dependence on Pfizer supply obligations, clinical and regulatory uncertainty, competition, ongoing funding needs, and the ability to service, refinance or satisfy convertible debt. The company reported no material legal proceedings, no material change to previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Fiocruz completes the expected 2017 purchases and whether the Brazil agreement’s purchase milestones are met.
- Cash runway and future funding needs in light of cash use, planned clinical spending, and the July financing and note exchange.
- Convertible-note principal, maturities, conversion terms, and potential dilution; the filing cites an approximately $0.85 initial conversion price for the July transactions.
- Progress and results of PRX-102, alidornase alfa, and OPRX-106 trials, as well as regulatory milestones.
- Revenue mix and gross margins as Pfizer and Brazil shipments change, including whether reported fair-value movements continue to materially affect earnings.