ADMA BIOLOGICS, INC. annual report, FY2018

ADMA Biologics, Inc. — Fiscal 2018 Form 10-K Summary

Business context and reporting period

ADMA is a vertically integrated biopharmaceutical company developing, manufacturing and commercializing plasma-derived biologics for immune deficiencies and infectious diseases. This filing covers the fiscal year ended December 31, 2018; the filing also provides unaudited fourth-quarter results. The 2018 results include a full year of operations from the Boca Raton manufacturing facility acquired in the June 2017 Biotest transaction, making comparisons with 2017 less representative.

• Commercial product: Nabi-HB, a hepatitis B immune globulin, was marketed and commercially available.
• Temporarily suspended product: BIVIGAM remained unavailable for commercial distribution pending FDA approval of a manufacturing supplement.
• Pipeline: RI-002, an immune globulin candidate for primary immune deficiency disease, was resubmitted to the FDA with a PDUFA action date of April 2, 2019.
• Operations: ADMA operated three FDA-licensed Georgia plasma centers during 2018. Norcross and Marietta were transferred to BPC effective January 1, 2019, leaving Kennesaw as the company’s remaining center.

Financial performance and liquidity

Metric	2018	2017	Change
Revenue	$17.0 million	$22.8 million	Down $5.8 million
Gross loss	$25.2 million	$6.4 million	Worsened $18.8 million
Operating loss	$60.3 million	$39.3 million	Worsened $21.0 million
Net loss	$65.7 million	$43.8 million	Worsened $22.0 million
Loss per share	$1.45	$1.91	Improved on higher share count
Net cash used in operations	$62.7 million	$37.3 million	Use increased $25.4 million

• Revenue consisted of $16.8 million of product revenue and $0.1 million of license revenue. 2017 included $7.0 million of non-recurring revenue related to a Sanofi manufacturing agreement amendment.
• Nabi-HB revenue increased by approximately $2.8 million, while normal source plasma revenue declined by approximately $1.6 million due to local competition.
• Cost of product revenue rose to $42.2 million, including an $8.9 million allowance for BIVIGAM and RI-002 inventory pending FDA approvals, approximately $9.0 million of unabsorbed Boca Facility costs and $1.5 million of remediation costs.
• Fourth-quarter 2018 revenue was $4.1 million and net loss was $18.0 million.
• Cash and cash equivalents were $22.8 million at December 31, 2018, compared with $43.1 million at year-end 2017. Including restricted cash, year-end cash totaled $26.8 million.
• Working capital was $34.9 million and stockholders’ equity was $19.8 million at December 31, 2018, compared with $52.9 million and $40.3 million, respectively, at year-end 2017.
• Inventory increased to $18.6 million from $12.6 million, largely reflecting raw materials and product manufactured for BIVIGAM and RI-002.
• Capital expenditures were $2.1 million in 2018; management expected 2019 capital expenditures of approximately $3.0 million to $5.0 million.

Debt and financing

• At December 31, 2018, the balance sheet included $26.4 million of senior notes, a $2.8 million end-of-term liability and $14.9 million of net related-party debt associated with the Biotest transaction. The related-party note has a 6% interest rate and matures June 6, 2022.
• ADMA completed a June 2018 equity offering of 9.6 million shares for $46.0 million of gross proceeds and $42.9 million of net proceeds.
• On February 11, 2019, ADMA refinanced the Marathon facility with a Perceptive senior secured credit facility of up to $72.5 million, including an initial $45.0 million term loan and up to $27.5 million of additional borrowing subject principally to FDA approval of BIVIGAM or RI-002. The facility bears interest at 7.5% plus the greater of one-month LIBOR or 3.5%, and matures March 1, 2022.
• The Perceptive facility is secured by substantially all company assets, including intellectual property, and includes a warrant for 1.36 million shares at an initial exercise price of $3.28 per share.

Material changes versus the prior comparable period

• Revenue declined because 2017 benefited from the $7.0 million Sanofi amendment payment and because plasma revenue decreased; the decline was partly offset by higher Nabi-HB sales.
• Manufacturing and operating costs increased substantially as ADMA operated the Boca Facility for a full year and produced BIVIGAM and RI-002 conformance lots.
• Research and development expense declined to $3.9 million from $5.6 million as the company shifted resources from development toward manufacturing and commercial operations.
• SG&A increased to $22.5 million from $18.8 million, primarily because of higher personnel, professional, insurance and operating costs; 2017 also included $3.9 million of transaction expenses.
• The FDA’s April 2018 inspection improved the Boca Facility’s status from Official Action Indicated to Voluntary Action Indicated, enabling regulatory submissions, although the Warning Letter had not been formally closed.
• ADMA retired 8.6 million non-voting Biotest shares in May 2018 without cash consideration. It issued 9.6 million common shares in the June 2018 public offering.
• Effective January 1, 2019, ADMA transferred two plasma centers to BPC, satisfying a $12.6 million purchase-price obligation. The company expected to record a non-cash gain in the first quarter of 2019, net of transferred assets’ approximately $1.1 million book value.

Guidance, outlook, risks and unusual items

• Management expected available cash, projected revenue and receivables, and the potential additional $27.5 million under the Perceptive facility to fund operations into the fourth quarter of 2019 if BIVIGAM or RI-002 received FDA approval. Without either approval, management expected funding only into the third quarter of 2019.
• The company stated that additional equity or debt financing would be required by the third or fourth quarter of 2019, depending on FDA outcomes. The auditors included a going-concern explanatory paragraph, and management reported substantial doubt about continuing as a going concern.
• BIVIGAM’s drug-product supplement was approved, but the FDA issued a Complete Response Letter for the drug-substance supplement requesting additional chemistry, manufacturing and controls information, deviation resolution and stability data. The timing and ultimate outcome of authorization remained uncertain.
• RI-002’s clinical program met its primary endpoint, but approval remained dependent on FDA review of manufacturing, quality and regulatory matters. Clinical results did not assure approval or commercial success.
• Key risks include continued FDA remediation requirements, manufacturing or product-quality failures, dependence on third-party plasma suppliers and fill-finish providers, limited commercial history, intense competition, reimbursement pressure and customer concentration.
• BPC represented 56% of 2018 revenue, McKesson 16% and AmerisourceBergen 15%; three customers represented approximately 95% of year-end accounts receivable.
• The company had accumulated losses of $216.4 million through December 31, 2018 and expects continuing operating losses and negative operating cash flow while it pursues regulatory approval, manufacturing scale-up and commercialization.
• No material legal proceedings were reported, and management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2018.

Important facts for investors to verify

• Whether and when the FDA approves the BIVIGAM drug-substance supplement and authorizes commercial relaunch.
• The FDA’s April 2, 2019 action on the RI-002 BLA and any approval conditions or labeling limitations.
• Current cash burn, available borrowing capacity and the timing, terms and dilution of any required financing.
• Whether the Boca Facility’s Warning Letter is formally closed and whether manufacturing remains compliant.
• The financial effect of transferring the Norcross and Marietta plasma centers and the company’s ability to replace that collection capacity.
• Revenue concentration, plasma supply commitments and the company’s ability to convert inventory into commercial sales without further material write-downs.
• The terms, collateral coverage, covenants and potential dilution associated with the Perceptive credit facility and warrant.