Aptevo Therapeutics Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2019; comparisons are with the three and nine months ended September 30, 2018 unless stated otherwise. Amounts are in millions of dollars, except per-share data. Aptevo is a biotechnology company whose sole marketed product is IXINITY; it also develops investigational oncology and hematology therapies using its ADAPTIR platform.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Product sales | $9.0 | $5.8 | $23.4 | $16.7 |
| Gross profit | $5.1 | $3.4 | $9.6 | $10.0 |
| Gross margin | 56% | 58% | 41% | 60% |
| R&D expense | $9.1 | $8.6 | $24.1 | $26.5 |
| SG&A expense | $6.5 | $6.9 | $20.3 | $21.6 |
| Net loss | $6.9 | $12.6 | $32.3 | $39.6 |
| Net loss per share | $0.16 | $0.55 | $0.82 | $1.76 |
- Revenue and margins: IXINITY sales rose 55% in Q3 and 40% year to date, attributed to patient-base expansion, the 3,000 IU vial size introduced in Q2, and 2019 price increases. Year-to-date cost of product sales more than doubled, and gross margin fell to 41%; the filing cites higher product costs, prior-year supplier credits, stability costs, and inventory write-offs.
- Cash flow: Net cash used in operating activities was $37.3 million for the first nine months, versus $44.1 million in 2018. Investing activities provided $4.1 million, including the $4.25 million Saol milestone receipt; financing provided $20.3 million, primarily from the March equity offering. Cash, cash equivalents, and restricted cash declined by $12.9 million to $25.2 million.
- Balance sheet at September 30: Cash and cash equivalents were $17.7 million; restricted cash was $7.5 million, including $5.0 million required under the credit agreement and $2.5 million securing letters of credit. Total assets were $60.6 million, current liabilities $37.3 million, total liabilities $40.8 million, and stockholders’ equity $19.7 million.
- Debt and liquidity: The MidCap loan had a net carrying value of $19.7 million, classified as current at quarter-end because the lender’s subjective acceleration clause could be invoked and its application was not within Aptevo’s control. The loan bears interest at LIBOR plus 7.60% and matures February 2023. MidCap has a security interest in registered intellectual property following the company’s unrestricted cash falling below $25 million in January; Aptevo reported no notice of default as of the filing date.
Material changes and notable items
- Net loss improved year over year, while IXINITY sales grew; however, the nine-month gross margin decline offset the sales growth at the gross-profit level.
- Shares issued and outstanding increased to 45.3 million from 22.8 million at December 31, 2018, primarily following a March 2019 public offering that raised net proceeds of $20.2 million. The offering included 22.0 million outstanding warrants exercisable at $1.30 per share; full exercise could provide up to $28.6 million, but is not assured.
- Q3 included a $4.25 million milestone payment from Saol related to the 2017 sale of the hyperimmune business. It was reported as discontinued-operations income of $3.25 million after tax; no further milestone amounts are outstanding.
- Aptevo discontinued APVO210 in October 2019 after Phase 1 data showed increasing anti-drug antibodies with repeated dosing. The company also said it would delay ALG.APV-527’s planned Q4 2019 clinical trial authorization submission and seek a partner before Phase 1.
Outlook, management commentary, and risks
- Going concern: Management concluded substantial doubt exists about Aptevo’s ability to continue as a going concern for the year following issuance of the statements. The company reported recurring losses, negative operating cash flow, and an accumulated deficit of $159.7 million, and said it needs additional funding for 2020. It warned that available funding may not be secured in time or on acceptable terms.
- Cost reductions and funding plans: An expense-reduction plan announced October 3 was expected to reduce annual expenditures by approximately 30%, through pipeline prioritization, lower professional and consulting costs, reduced leased space and non-commercial headcount, and lower executive and board cash compensation. Funding options include equity sales, partnerships or asset transactions, and additional debt; none is assured. Failure to obtain funding could force further cuts or delays to development and operations.
- Development updates: APVO436 was in a Phase 1/1b trial in AML and MDS; additional anti-drug antibody data were anticipated in the first half of 2020. Aptevo anticipated starting dosing in its IXINITY pediatric post-marketing study by the end of 2019. These are stated expectations, not guaranteed outcomes.
- Key business risks: IXINITY is the company’s only revenue-generating product, making results dependent on its sales, reimbursement, supply, and competition. A double-digit royalty applies to U.S. net sales above $25 million in a calendar year; none had been recorded to date. Additional risks include reliance on third-party manufacturers and clinical-service providers, clinical and regulatory uncertainty, potential dilution from financing, debt covenants and collateral rights, and Nasdaq’s minimum-bid-price requirement. Aptevo reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Cash runway and the amount and timing of financing needed to fund operations through 2020; assess the going-concern warning alongside actual subsequent financing or partnership developments.
- IXINITY sales, product costs, inventory write-offs, and whether annual U.S. net sales trigger the contractual royalty threshold.
- MidCap loan covenants, minimum-cash requirements, acceleration provisions, debt classification, and the lender’s intellectual-property security interest.
- Execution and realized savings from the approximately 30% expense-reduction plan, including any impact on clinical programs.
- Clinical and partnering progress for APVO436, the IXINITY pediatric study, and ALG.APV-527, as well as any further implications of discontinuing APVO210.
- Potential dilution from outstanding warrants and remaining equity-sale programs, and compliance with Nasdaq listing requirements.