Aptevo Therapeutics Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts below are in millions unless stated otherwise. Aptevo is a biotechnology company whose only marketed product is IXINITY, for hemophilia B; its other candidates are investigational.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $5.8 | $6.2 | $16.7 | $11.8 |
| IXINITY product sales | $5.8 | $2.5 | $16.7 | $8.1 |
| Operating loss | $(12.1) | $(10.3) | $(38.1) | $(37.1) |
| Net loss | $(12.6) | Net income $37.9 | $(39.6) | Net income $16.7 |
| Operating cash flow | Not stated separately | Not stated separately | $(44.1) | $(26.2) |
- IXINITY sales increased 132% in Q3 and 106% year to date. Gross margin was 58% in Q3 versus 25%; year-to-date margin was 60% versus 62%.
- Q3 research and development expense rose to $8.6 million from $7.2 million; nine-month expense rose to $26.5 million from $19.8 million, mainly due to preclinical research and discovery. Selling, general and administrative expense declined to $6.9 million in Q3 and $21.6 million year to date.
- At September 30, cash and cash equivalents were $28.4 million and short-term investments were $9.2 million. Management reported $45.5 million in cash, cash equivalents and short-term investments, including $7.8 million restricted; those balance-sheet components imply approximately $37.6 million unrestricted. Cash, cash equivalents and restricted cash totaled $36.3 million.
- Total assets were $78.9 million and stockholders’ equity was $44.0 million. Debt was $19.1 million, all long-term; current debt was zero. Interest accrues at LIBOR plus 7.60%.
Material changes and unusual items
- 2017 comparative net income included the sale of the Hyperimmune Business to Saol, completed in September 2017, and discontinued-operation income. The 2017 sale gain was approximately $52.5 million before tax; it is not recurring operating performance. Aptevo recorded $0.1 million of related income in the first nine months of 2018 from accounts-receivable collections.
- Q3 2017 included $3.7 million of deferred collaboration revenue recognized after MorphoSys terminated its collaboration. Aptevo reported no collaboration revenue in 2018.
- Nine-month 2017 cost of product sales benefited from a one-time $3.0 million credit related to an AGC manufacturing dispute. In 2018, lower-cost inventory supplied under a manufacturing credit also supported Q3 margins.
- Investing cash inflow of $63.8 million in the first nine months of 2018 primarily reflected investment maturities, not operating cash generation. Operating cash use increased to $44.1 million.
- Aptevo amended its MidCap credit facility in August 2018: principal repayments were deferred to February 1, 2020, with an opportunity for further deferral to August 1, 2020; required restricted cash was reduced from $10 million to $5 million. The facility matures February 1, 2023.
Outlook, risks and contingencies
- Management expected existing cash, cash equivalents and short-term investments to fund operations for at least 12 months from the filing date. It also stated that additional funding would be needed to complete clinical development of any development-stage candidate and anticipated continued negative cash flow.
- IXINITY is the sole product-revenue source. Its sales depend on market acceptance, reimbursement, distribution and supply; AGC Biologics is the sole bulk drug-substance manufacturer. Failure or interruption in supply could harm sales and development.
- Pipeline timing stated in the filing: APVO436 clinical development planned for Q4 2018; APVO210 clinical development planned for Q1 2019; and an Alligator collaboration CTA filing for ALG.APV-527 intended in the second half of 2019. These were plans, not assurances.
- Aptevo discontinued development and enrollment for APVO414 and otlertuzumab, while continuing to monitor patients remaining on therapy. Management cited anti-drug antibodies for APVO414 and limited early responses and lower-than-expected CD37 expression in the otlertuzumab PTCL study.
- Key risks include ongoing losses and financing needs, reliance on one commercial product and one principal manufacturer, uncertain clinical and regulatory outcomes, competition and pricing/reimbursement pressure, and credit-agreement covenants. Saol escrow and contingent payments may be subject to claims, milestones and collection conditions.
- No specific revenue or earnings guidance was provided. Management said results may fluctuate and that it may need to raise capital or delay, reduce, suspend or eliminate research programs if financing is unavailable.
- The filing reported no pending legal matter believed likely to have a material adverse effect. Management concluded disclosure controls were effective as of September 30, 2018.
Investor facts to verify
- Whether IXINITY sales growth continues and whether margins remain sustainable as lower-cost inventory benefits change.
- Unrestricted liquidity, operating cash burn, and the timing and terms of any financing needed for operations and clinical programs.
- Compliance with MidCap revenue and cash covenants, and the conditions for any further principal-payment deferral.
- IXINITY manufacturing reliability at AGC and any supply, quality, reimbursement or distribution changes.
- Actual clinical, regulatory and filing progress for APVO436, APVO210 and ALG.APV-527, and any further pipeline reprioritization.
- Resolution of the Saol escrow and any contingent milestone or receivables payments.