Business context and reporting period
This is OncoGenex Pharmaceuticals, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed February 23, 2017—not a 10-K filed under the name Achieve Life Sciences, Inc. The company was a clinical-stage oncology biopharmaceutical business with no product sales. In January 2017, it agreed to acquire privately held Achieve Life Science, Inc. in an all-stock merger; the combined company was expected to be renamed Achieve Life Sciences, Inc. and the transaction was expected to close mid-2017.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Collaboration revenue | $5.1 million | $18.2 million |
| Operating expenses | $26.3 million | $36.9 million |
| Net loss | $20.1 million | $16.8 million |
| Net loss per share | $0.67 | $0.64 |
| Cash, cash equivalents and short-term investments at year-end | $25.5 million | $55.2 million |
| Net cash used in operating activities | $29.7 million | $9.1 million |
| Total assets | $27.5 million | $58.2 million |
| Total liabilities | $8.5 million | $20.8 million |
Revenue was entirely collaboration revenue, principally recognition of a Teva advance reimbursement for custirsen-related development. The advance was fully recognized by June 30, 2016; the company said it expected no further Teva payments. Revenue fell about 72% year over year. R&D expense declined to $14.8 million from $25.1 million, and G&A expense fell to $8.9 million from $11.8 million, but the net loss increased. The 2016 loss included $2.2 million of restructuring costs, a $1.4 million Ionis settlement expense and a $0.2 million asset impairment charge; a $1.3 million lease-liability recovery partly offset these items. No operating margin is meaningful given the development-stage business and the absence of product sales.
Year-end current assets were $26.9 million and current liabilities $8.5 million. The balance sheet lists no conventional borrowings; long-term obligations were $49,000, with a further $57,000 current portion. Management said available cash, cash equivalents and short-term investments would fund currently planned operations for at least 12 months, while cautioning that assumptions could prove wrong. Operating cash use rose sharply from 2015, when the company received Teva advance funding. Investing cash flow was $10.6 million provided, mainly reflecting investment maturities and purchases; financing cash flow was essentially nil.
For the fourth quarter of 2016, collaboration revenue was zero and net loss was $5.8 million. Quarterly R&D expense was $1.7 million; restructuring expense was $1.8 million and impairment expense was $0.2 million.
Material changes and operating developments
- Custirsen development was discontinued after it failed to meet the primary overall-survival endpoint in three Phase 3 trials. Clinical trials and related activities were being wound down, and the related Ionis and University of British Columbia licenses were terminated.
- OGX-225, a preclinical candidate, was discontinued in January 2017; the UBC license termination remained subject to Ionis’s reversion rights.
- Apatorsen, designed to inhibit Hsp27, was the remaining principal oncology candidate. The company did not intend to fund further apatorsen studies itself and was seeking a development or commercialization partner. Most randomized Phase 2 trials did not meet their prespecified endpoints; Borealis-2 reported a survival signal at a one-sided 10% significance level.
- Workforce reductions in 2016 eliminated 30 positions across the February, October and November actions. The filing reports 17 employees at year-end, while a risk-factor discussion says 12 remained after the reductions; investors should clarify the headcount and timing.
- Cash and short-term investments fell by $29.7 million, while total liabilities declined chiefly as clinical accruals and deferred collaboration revenue were reduced.
Outlook, risks and contingencies
The merger remained subject to stockholder approval and other closing conditions. If completed, existing OncoGenex holders were expected to own about 25% of the combined company and Achieve holders about 75%, substantially diluting current holders’ relative voting power. The agreement included potential termination fees of $0.5 million, or up to $1.0 million for specified covenant breaches, plus certain expense reimbursements. If the deal failed, the board might consider dissolution and liquidation; the amount available to stockholders would depend on cash burn and reserves for obligations and contingencies.
Existing OncoGenex stockholders were expected to receive one non-transferable contingent value right per share, potentially entitling holders to 80% of specified apatorsen-related consideration received by the combined company during the five years after closing, less agreed offsets. The company was to use defined efforts for six months beginning in February 2017 to pursue a partner; if no term sheet was obtained, the combined company would have no continuing contractual obligation to pursue a deal and the CVRs would have no payable value.
Key risks include the uncertain merger, limited runway relative to historical operating cash use, no recurring revenue after Teva, dependence on a partner for apatorsen, weak or mixed clinical evidence, clinical and regulatory uncertainty, and competition. The company had received a Nasdaq notice for failing the $1.00 minimum bid-price requirement and said it intended to regain compliance, potentially through a reverse stock split after the merger; delisting could affect the transaction and liquidity. A 10% strengthening of the Canadian dollar was estimated to affect 2016 results by $0.3 million; a 1% interest-rate increase was estimated to reduce investment fair value by $0.2 million.
Apatorsen trial disclosures give differing expected timing for Spruce-2 results: elsewhere results are expected in 2018, while the MD&A says the second half of 2017. The filing does not reconcile the dates. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether the Achieve merger closed, its final exchange ratio, transaction costs, ownership split and any post-merger financing or dilution.
- Whether a third-party apatorsen term sheet was obtained within the CVR effort period, and the final CVR terms, offsets and milestones.
- The actual cash runway after restructuring and wind-down costs, given $25.5 million of year-end cash and investments versus $29.7 million of 2016 operating cash use.
- The correct Spruce-2 results timetable and final results, alongside the clinical and statistical details of the Borealis-2 survival finding.
- The final employee headcount and remaining clinical, severance, lease, licensing and litigation-related obligations.
- Whether the company regained Nasdaq bid-price compliance and met the combined company’s listing requirements.