Avalo Therapeutics, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are with fiscal 2020. Avalo changed its name from Cerecor Inc. in August 2021. It is a clinical-stage precision-medicine company focused on immunology and rare genetic diseases, with Millipred as its sole marketed product. This is an annual report, not a standalone fourth-quarter filing.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Product revenue, net | $4.8 million | $6.7 million |
| License revenue | $0.6 million | None |
| Total revenue | $5.4 million | $6.7 million |
| Cost of product sales | $1.5 million | $0.3 million |
| Research and development expense | $59.8 million | $32.2 million |
| General and administrative expense | $21.8 million | $17.4 million |
| Net loss | $84.4 million | $63.5 million |
| Net cash used in operating activities | $70.9 million | $40.5 million |
| Cash and cash equivalents at year-end | $54.6 million | $18.9 million |
| Notes payable, gross principal and final fee | $36.1 million | None |
Millipred product revenue declined 29% year over year, despite higher gross sales, due to a larger returns allowance—including a full allowance on short-dated inventory—and a $0.5 million write-off of uncollected Aytu-related receivables. The transition of Millipred commercial operations from Aytu to Avalo in the third quarter may also have disrupted sales. Product cost rose primarily because Avalo began paying Teva 50% of Millipred net profit, subject to a $0.5 million quarterly minimum. The filing does not provide a clearly stated gross-margin metric.
R&D expense increased $27.6 million, driven by the $10 million AVTX-002 license fee, higher clinical and manufacturing costs, and increased R&D staffing. Net loss also reflects $2.4 million of net interest expense on the 2021 debt financing; 2020 included a $5.2 million gain on the Aytu investment and $25.5 million of acquired in-process R&D expense. Financing activities provided $106.8 million in 2021, including equity and debt proceeds; cash increased $35.8 million during the year. Accumulated deficit was $262.2 million, and stockholders’ equity was $23.1 million at year-end.
Business developments and changes
- AVTX-002: Avalo reported data from the first two cohorts of its Crohn’s disease Phase 1b trial and Phase 2 proof-of-concept data in COVID-19 ARDS; it received Fast Track designation for the ARDS program. The company also licensed expanded worldwide rights from Kyowa Kirin.
- AVTX-007: The first patient was enrolled in a Phase 1b open-label proof-of-concept trial in adult-onset Still’s disease. In early 2022, Avalo said it was winding down development of AVTX-007 in multiple myeloma.
- AVTX-803 received Fast Track designation. AVTX-008, an immune checkpoint program, was added through an in-license.
- Avalo out-licensed AVTX-301 and assigned AVTX-406 to third parties, receiving $0.6 million in aggregate license revenue and retaining eligibility for specified milestone and, for AVTX-301, royalty payments. The AVTX-406 counterparty is an Armistice affiliate; the filing says the related-party transaction was approved under company policy.
- In 2022, Avalo paused AVTX-802 development pending alignment with FDA on trial design, planned to pursue strategic alternatives for AVTX-006, and shifted its AVTX-002 IBD plans away from the contemplated UC cohort toward consideration of a randomized controlled IBD trial.
Liquidity, outlook, and principal risks
Management and the auditor stated that substantial doubt exists about Avalo’s ability to continue as a going concern within one year after issuance of the financial statements. The company reported $54.6 million in cash at December 31, 2021, but used $70.9 million in operating cash and expects continued losses. Management expects to need additional financing and intends to consider equity or other financings, grants, partnerships, out-licensing, and sales of non-core assets. If funding is unavailable, development programs may be reduced, delayed, suspended, or terminated. No firm financial guidance is provided; management expected early-2022 operating expenses to be similar to the late-2021 run rate, with subsequent spending dependent on trial outcomes, business development, and capital availability.
The $35 million venture debt facility carries interest at 6.25% plus prime, with an effective rate of 13.5% at year-end, and is secured by substantially all company assets other than specified exclusions. Interest-only payments were extended to 24 months; scheduled maturities fall in 2025. The agreement includes restrictive covenants and a material-adverse-change default provision that could permit acceleration. Avalo reported no known covenant breach or default notice as of the filing date. Other notable exposures include guarantees of certain Aytu-assigned obligations, including a disclosed $3 million remaining fixed Deerfield obligation, and substantial future development, regulatory, sales-milestone, and royalty commitments under licenses.
COVID-19 had not caused a significant direct financial impact by the filing date, but Avalo reported slower trial enrollment and drug-supply manufacturing delays. Other key risks include clinical and regulatory failure, dependence on contract manufacturers and CROs, limited commercial revenue, potential dilution and concentrated ownership, and Nasdaq listing compliance. As of February 22, 2022, Armistice beneficially owned approximately 44% of outstanding common stock. In February 2022, the company also announced executive leadership changes and subsequent officer separations; approximately $1.6 million of related severance was expected to be recognized in first-quarter 2022.
Most important facts for investors to verify
- Whether Avalo can secure sufficient financing to address the going-concern uncertainty, and how any financing affects dilution and development priorities.
- Current cash runway, operating burn, debt service schedule, covenant compliance, and any lender action under the material-adverse-change provisions.
- Updated clinical data, trial designs, enrollment timelines, and regulatory milestones for AVTX-002 and AVTX-007; confirm whether the anticipated AVTX-002 asthma top-line data in fourth-quarter 2022 was achieved.
- Collection of Aytu receivables: approximately $4.3 million was recorded at year-end, including $1 million long-term; Avalo reported receiving $2.2 million after year-end.
- Millipred sales, returns, Teva profit-share minimums, and remaining license term through September 30, 2023.
- Execution of portfolio changes, expected severance and wind-down costs, and any realized value from out-licenses, grants, or strategic transactions.
Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at a reasonable level as of December 31, 2021. Ernst & Young issued an unqualified opinion on the financial statements and highlighted accounting for long-term debt as a critical audit matter. The filing reported no legal proceedings.