Aclaris Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2019. Aclaris is a physician-led biopharmaceutical company focused on immuno-inflammatory diseases, with research programs, a contract research services business, and commercial products whose results have been recast as discontinued operations.
In September 2019, management completed a strategic review and decided to refocus resources on immuno-inflammatory development programs while seeking partners for commercial products and certain development assets. ESKATA commercialization was voluntarily discontinued in August 2019. The worldwide rights to RHOFADE were sold to EPI Health on October 10, 2019, after the reporting period.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 | ||
|---|---|---|---|---|
| 2019 | 2018 | 2019 | 2018 | |
| Continuing revenue | $0.98 million | $1.12 million | $3.13 million | $4.38 million |
| Contract research revenue | $0.98 million | $1.12 million | $3.13 million | $3.38 million |
| Loss from operations | $(22.86) million | $(21.34) million | $(93.51) million | $(60.74) million |
| Loss from continuing operations | $(23.14) million | $(20.63) million | $(94.09) million | $(58.55) million |
| Loss from discontinued operations | $(32.18) million | $(12.11) million | $(48.67) million | $(35.64) million |
| Net loss | $(55.32) million | $(32.74) million | $(142.76) million | $(94.19) million |
| Net loss per share | $(1.34) | $(1.06) | $(3.46) | $(3.04) |
- Implied contract research gross margin was approximately 16% for the quarter and 3% for the nine-month period, although management states gross profit is not a meaningful measure because of the nature of contract research revenue.
- Research and development expense increased to $53.3 million from $41.5 million for the nine-month comparison, driven primarily by A-101 45% development, ATI-450 activities, personnel costs, and a $4.0 million Rigel milestone payment.
- Non-cash charges included an $18.5 million goodwill impairment and a $27.6 million RHOFADE intangible-asset impairment. Stock-based compensation was $13.0 million for the nine months.
- Cash used in operating activities was $76.1 million versus $73.6 million in the prior-year period. Investing activities provided $49.2 million, primarily from net sales and maturities of marketable securities.
- Cash and cash equivalents were $29.9 million and marketable securities were $61.5 million at September 30, 2019, for total cash, cash equivalents and marketable securities of $91.4 million.
- Total assets were $160.4 million and stockholders’ equity was $85.3 million at September 30, 2019. Accumulated deficit was $434.9 million.
- Long-term debt was $29.9 million at quarter end. The company repaid the $30.0 million Oxford term loan on October 10, 2019, together with approximately $70 thousand of interest, a $1.725 million final payment fee, and a $0.6 million prepayment fee.
Material changes versus the prior comparable period
- Nine-month continuing revenue declined $1.25 million, primarily because the prior-year period included $1.0 million of other revenue from the Cipher license agreement and contract research revenue decreased $0.25 million.
- Nine-month net loss increased $48.6 million, reflecting higher research and development spending, the goodwill impairment, lower other income, and larger losses from discontinued operations.
- Discontinued operations generated $13.7 million of product sales in the first nine months of 2019, including $13.4 million from RHOFADE and $0.3 million from ESKATA, compared with $2.0 million of ESKATA sales in the prior-year period.
- The RHOFADE asset was classified as held for sale and written down to a $33.8 million net realizable value. The company also recorded restructuring charges after terminating or providing notice to 86 employees.
- ATI-450 advanced into a Phase 1 trial after its IND was allowed by the FDA. The company reported positive Phase 2 results for oral ATI-501 in alopecia areata, while topical ATI-502 did not achieve statistical superiority in its alopecia areata trial.
Guidance, outlook, commentary and risks
- Management expects continued net losses and significant cash needs while advancing ATI-450, A-101 45% Topical Solution, preclinical compounds, and discovery activities. No formal revenue or earnings guidance is provided.
- Management stated that existing cash, cash equivalents and marketable securities were expected to fund operating and capital requirements for more than 12 months from the financial statement issuance date, based on current assumptions. Additional capital will likely be required, and may come from equity, debt, partnerships, licensing, or other strategic transactions.
- Management expects Phase 1 ATI-450 data by the end of the first quarter of 2020 and, if successful, a Phase 2 trial in rheumatoid arthritis in the first half of 2020. The A-101 45% safety-extension trial was expected to conclude in the first half of 2020, and an IND or equivalent filing for ATI-1777 was expected in mid-2020.
- Key risks include the need for additional financing, continued operating losses, uncertain clinical and regulatory outcomes, dependence on third-party manufacturers and contract research organizations, difficulty securing development or commercialization partners, intellectual-property challenges, and potential dilution from future financings.
- Two putative securities class actions allege that the company failed to disclose potential regulatory scrutiny of ESKATA advertising. The company disputes the claims. A patent infringement lawsuit was filed against Taro relating to its proposed generic RHOFADE product; EPI Health agreed to seek substitution as plaintiff and reimburse certain expenses.
- Under the RHOFADE disposition, EPI Health agreed to pay up to $55.0 million, consisting of $35.0 million upfront and up to $20.0 million in sales milestones, plus royalties and other contingent consideration. The filing does not state the ultimate amount or timing of such payments beyond the contractual terms.
Most important facts for investors to verify
- Whether the reported cash runway remains adequate after the RHOFADE divestiture, debt repayment, restructuring costs, clinical spending, and other cash commitments.
- The amount and timing of any cash actually received from EPI Health, including escrowed proceeds, sales milestones, royalties, inventory adjustments, and potential obligations assumed by EPI Health.
- Clinical, regulatory, and partnering progress for ATI-450, A-101 45% Topical Solution, ATI-501, ATI-502, ATI-1777, and other pipeline candidates.
- The status and potential financial exposure of the securities class actions and RHOFADE patent litigation.
- Future financing requirements, potential equity dilution, and remaining milestone, royalty, lease, and contingent consideration obligations.
- The comparability of future results, given the strategic refocus, discontinued operations presentation, RHOFADE divestiture, ESKATA discontinuation, workforce reduction, and impairment charges.