Protalix BioTherapeutics, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports unaudited fourth-quarter results. Unless noted, financial amounts are U.S. dollars.
Business context
Protalix develops recombinant therapeutic proteins using its proprietary plant-cell ProCellEx platform. Its marketed product, taliglucerase alfa, is sold as alfataliglicerase in Brazil; Pfizer holds commercialization rights elsewhere. The main development priority is PRX-102 for Fabry disease, alongside alidornase alfa (PRX-110) for cystic fibrosis and oral anti-TNF candidate OPRX-106 for ulcerative colitis.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $19.2 million | $9.2 million |
| Cost of revenue | $15.2 million | $8.4 million |
| Gross profit / gross margin | $4.0 million / 20.8% | $0.8 million / 8.7% |
| Net R&D expense, after grants | $28.8 million | $24.6 million |
| Selling, general and administrative expense | $11.5 million | $9.4 million |
| Operating loss | $36.4 million | $33.2 million |
| Net loss from continuing operations | $85.3 million | $29.2 million |
| Cash used in operating activities | $10.0 million | $32.1 million |
| Cash and cash equivalents at year-end | $51.2 million | $63.3 million |
FY 2017 revenue comprised $12.1 million of drug substance supplied to Pfizer and $7.1 million of Brazil sales. Revenue increased 109%, principally from higher sales to both customers. The reported continuing-operations loss included a $38.1 million non-cash charge from remeasurement of the 7.5% convertible-note embedded derivative; management cited a $47.3 million loss excluding this one-time charge.
At year-end, total assets were $72.2 million, current assets $62.7 million, current liabilities $22.8 million, and total liabilities $103.5 million. Current assets exceeded current liabilities by approximately $39.9 million. The balance sheet reported convertible-note liabilities of approximately $52.2 million; contractual obligations listed $83.0 million for convertible notes. Total stockholders’ capital deficiency was $31.3 million.
Investing activities used $1.1 million and financing activities used $1.4 million in 2017. The company reported no off-balance-sheet arrangements. Management said available cash was expected to fund planned operations for at least 12 months, while cautioning that assumptions could change and additional funding might be needed.
Material changes and developments
- Chiesi licensed PRX-102 outside the United States in October 2017. Protalix received a $25 million upfront payment and may receive up to $25 million in development-cost payments, capped at $10 million annually, and up to $320 million in regulatory and commercial milestones. These upfront and development payments are deferred under the company’s accounting policy until commercial manufacturing begins. Protalix retains U.S. rights and is responsible for manufacturing supply.
- PRX-102 was in Phase III studies. The European Commission granted it orphan-drug designation in December 2017; FDA Fast Track designation followed in January 2018. Neither designation guarantees approval.
- PRX-110’s Phase IIa cystic-fibrosis study was completed, and the company was evaluating next steps and potential collaborations. OPRX-106 Phase II interim results released in January 2018 were preliminary; complete results were expected by the end of March 2018.
- The Brazilian Ministry of Health issued a 2017 purchase order of approximately $24.3 million for alfataliglicerase, with shipments beginning in June. Fiocruz’s purchases remained materially below certain contractual milestones, giving Protalix a termination right; the company continued supply while discussing compliance with Fiocruz.
- Cash declined by $12.1 million year over year. Shares outstanding increased from 124.1 million to 143.7 million during 2017, including shares issued upon note conversions.
Outlook, risks and unusual items
- Management expected R&D to remain the primary expense, particularly as PRX-102 trials advanced. The filing provides no earnings or revenue guidance.
- Debt refinancing is a significant near-term risk. The remaining 4.5% notes included $5.9 million principal due September 2018. If those notes were not refinanced, retired or defeased by June 16, 2018, the 7.5% notes’ maturity could accelerate to June 15, 2018. The 7.5% notes are secured by material assets, including intellectual property, and carry restrictive covenants.
- The company depended on partner performance, notably Chiesi’s future development and commercialization efforts, Pfizer supply arrangements, and Fiocruz’s Brazilian purchase commitments. Failure to meet Pfizer supply obligations could trigger financial penalties.
- Protalix warned of clinical-trial, regulatory, manufacturing, reimbursement, competition, intellectual-property, financing and dilution risks. It also cited operating exposure to Israel-related disruption and currency movements.
- Approximately 81.6 million shares were reserved for conversion of notes, and the company said only about 6.9% of authorized common shares remained available or unreserved. It planned to seek stockholder approval to increase authorized shares.
- The filing reported no material legal proceedings. The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Cash runway and financing plans, including the status and terms of the 4.5% and 7.5% convertible notes and the June 2018 maturity-acceleration condition.
- PRX-102 Phase III enrollment, interim and final analyses, regulatory requirements, and the terms and timing of Chiesi reimbursements and milestones.
- Fiocruz’s purchases against contractual commitments, fulfillment of the $24.3 million order, and any decision on continuing or terminating the Brazil agreement.
- Whether reported OPRX-106 interim findings are confirmed by complete trial results, and what development path is selected for PRX-110.
- Potential dilution from note conversions and the outcome of the proposed increase in authorized shares.
- How much of the $25 million Chiesi upfront payment remains available, given it is recorded as deferred revenue rather than recognized 2017 revenue.