Protalix BioTherapeutics, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Financial amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise noted. The interim financial statements are unaudited.
Business context
Protalix develops recombinant therapeutic proteins using its ProCellEx plant-cell expression system. On May 1, 2012, the FDA approved taliglucerase alfa (ELELYSO) for adults with type 1 Gaucher disease. Pfizer markets the drug in the United States under an exclusive worldwide license, while Protalix retains Israeli rights. Protalix receives 40% of net profits or bears 40% of net losses under the collaboration, subject to the agreement’s terms.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $26.1 | $0.8 | $30.0 | $4.9 |
| Gross profit (loss) | $22.0 | $(4.8) | $24.4 | $0.5 |
| Net R&D expense | $8.9 | $7.3 | $15.7 | $15.6 |
| General and administrative expense | $3.5 | $1.8 | $5.1 | $3.8 |
| Operating profit (loss) | $9.6 | $(13.9) | $3.6 | $(18.9) |
| Net profit (loss) | $9.6 | $(13.7) | $3.7 | $(18.7) |
| Diluted earnings (loss) per share | $0.10 | $(0.16) | $0.04 | $(0.22) |
Gross margin was approximately 84% in Q2 and 81% for the first half, calculated from reported gross profit and revenue. Profitability was substantially affected by the $25 million Pfizer milestone triggered by FDA approval; revenue also included amortization of earlier Pfizer upfront and milestone payments. Accordingly, reported profit is not a measure of recurring product-sales profitability. Q2 cost of revenue included $1.8 million in royalties and $1.5 million primarily in manufacturing-facility costs. The company recorded its share of Pfizer collaboration losses: $0.9 million in Q2 and $1.0 million for the first half of 2012.
Cash, liquidity and capitalization
- Cash and cash equivalents were $59.3 million at June 30, 2012, up from $27.0 million at year-end 2011. Total current assets were $65.9 million and current liabilities $21.3 million.
- First-half operating cash flow was $6.8 million, compared with cash used of $8.8 million in 2011; investing used $1.1 million, and financing provided $26.6 million, principally from equity issuance and option exercises.
- The company raised approximately $25.4 million net from a February public offering and received approximately $1.1 million from option exercises. Shares outstanding were approximately 91.9 million at June 30 and July 30, 2012.
- Total liabilities were $76.4 million, including $53.5 million in current and long-term deferred revenue. The balance sheet reports a $4.7 million long-term liability; the filing text does not clearly identify it as conventional debt. Management reported no off-balance-sheet arrangements.
- Management believed available funds would support planned activities for at least 12 months, while cautioning that unexpected costs, development plans, or delays could require additional financing.
Material developments, outlook and risks
- The EMA’s CHMP recommended against EU marketing authorization in June. The filing says the recommendation reflected orphan-market exclusivity granted to competing VPRIV, not taliglucerase alfa’s safety or efficacy; next steps were under discussion. Up to $25 million in EU-related Pfizer milestones remained contingent on regulatory outcomes.
- Applications were pending in the EU, Israel, Brazil, Australia and other territories. Protalix noted that approvals and sufficient revenues to support operations were not assured.
- Management expected continued significant R&D spending and said R&D would remain the primary expense. Future results depend on commercialization, regulatory decisions, clinical progress and financing availability.
- In July 2012, Protalix and Pfizer resupplied some Brazilian vials previously subject to a returns allowance. The approximately $6.5 million gross value was expected to be recorded by Pfizer in Q3; Protalix’s share was not quantified in the filing text. Discussions about a possible longer-term Brazilian supply arrangement were preliminary and did not assure an agreement.
- FDA approval triggered recognition of performance-based stock compensation; the company recorded approximately $3.5 million of cumulative expense in Q2. A subsequent July grant of 1.5 million restricted shares had an estimated fair value of approximately $8.6 million.
- Management said disclosure controls were effective and reported no material changes in internal control over financial reporting. The filing reported no material legal proceedings and no material changes to previously disclosed risk factors.
Investor facts to verify
- How much of future revenue and earnings reflects recurring ELELYSO sales versus amortized Pfizer payments, milestones, royalties and collaboration costs.
- Pfizer’s U.S. commercialization progress, product sales, and the calculation and timing of Protalix’s 40% share of collaboration profits or losses.
- Regulatory status and potential financial impact of the EU CHMP opinion, and approval prospects in Israel, Brazil, Australia and other markets.
- Whether the expected Brazilian vial resupply revenue was recognized in Q3 and what amount accrued to Protalix.
- Cash runway under higher R&D, commercialization and operating costs, and the potential effect of additional financing or equity dilution.