Axsome Therapeutics, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Axsome is a clinical-stage biopharmaceutical company developing CNS therapies; it had no approved products and had generated no revenue.
Business context and pipeline
The company reported three clinical-stage candidates: AXS-05, AXS-02 and AXS-06. During the period, it was conducting Phase 3 studies of AXS-05 for treatment-resistant depression (STRIDE-1) and AXS-02 for complex regional pain syndrome (CREATE-1) and knee osteoarthritis associated with bone marrow lesions (COAST-1). AXS-05’s Phase 2/3 Alzheimer’s agitation study, ADVANCE-1, began enrolling its first patient in July 2017; this was after quarter-end. AXS-02 development for chronic low back pain was also planned, with trial start dependent on readouts from other studies.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | None | None | None | None |
| R&D expense | $5.0m | $5.3m | $11.0m | $9.8m |
| G&A expense | $1.7m | $1.5m | $3.4m | $2.9m |
| Total operating expenses | $6.8m | $6.8m | $14.4m | $12.7m |
| Net loss | $7.1m | $6.8m | $15.1m | $12.7m |
| Basic and diluted loss per share | $0.30 | $0.36 | $0.70 | $0.66 |
Cash was $38.0m at June 30, 2017, versus $36.6m at December 31, 2016. Six-month operating cash use was $13.7m, compared with $9.3m in the prior-year period; investing cash use was immaterial. Financing provided $15.1m, including $14.8m net proceeds from a March 2017 stock offering and approximately $0.3m from option and warrant exercises. Accumulated deficit was $62.7m.
Total assets were $39.0m and total liabilities were $16.3m at June 30. Current assets of $38.8m exceeded current liabilities of $8.2m. Loan obligations were $10.0m principal, with $1.9m classified as current and $8.1m as long-term on the balance sheet. The loan bears interest at 4.50% plus prime, matures in November 2020, and carries an 8.5% final payment fee. No operating margin is meaningful because the company had no revenue.
Changes versus comparable periods
- Q2 operating expenses were nearly flat year over year: lower R&D spending on previously initiated trials was largely offset by ADVANCE-1 start-up and AXS-06 Phase 1 work; G&A increased, principally from intellectual-property and stock-compensation costs.
- For the first six months, operating expenses rose $1.7m and net loss rose $2.4m year over year. Management attributed higher R&D to ADVANCE-1, AXS-06 Phase 1 and manufacturing costs; higher G&A was primarily related to stock compensation.
- Operating cash use increased $4.5m year over year, reflecting increased clinical, manufacturing, personnel and loan-interest spending. Cash nevertheless rose during H1 2017 due principally to the equity offering.
- Common shares outstanding increased from 19.2m at December 31, 2016 to 23.6m at June 30, 2017, primarily reflecting the March offering.
Outlook, risks and unusual items
- Management estimated that June 30 cash would fund anticipated operating requirements into the first quarter of 2019. It cautioned that trial timing, design and costs could cause cash to run out sooner; additional financing will be needed, and availability on acceptable terms is uncertain.
- The company expects significant and increasing losses, has no product revenue, and may never become profitable. It expects expenses to rise as clinical development advances and potentially as commercial infrastructure is built.
- Two additional $5m SVB loan tranches were available only upon specified clinical and financial milestones. The second required positive interim CREATE-1 results and at least $30m of qualifying net equity proceeds; the third also required qualifying CREATE-1 data by year-end 2017. The loan is secured by company assets other than intellectual property, which is subject to a negative pledge.
- In July 2017, Axsome reported that AXS-06 met the primary endpoint in a completed Phase 1 trial and received FDA Pre-IND written guidance on a proposed development program. AXS-05 had received FDA Fast Track designation for Alzheimer’s agitation in May 2017 and for treatment-resistant depression in February 2017. Fast Track does not assure approval or faster review.
- Material development risks include clinical-trial failure or delays, enrollment and manufacturing constraints, regulatory requirements, competition and future financing needs. The filing also highlights potential safety issues and that AXS-05 Phase 3 uses a single-tablet formulation unlike some earlier studies, potentially prompting additional FDA work.
- Grünenthal challenged two AXS-02-related patents through USPTO post-grant review petitions. In July 2017, the PTAB declined to institute review of one patent on novelty, obviousness and enablement grounds, but instituted review limited to written description. The second petition remained pending at filing.
- Axsome licenses relevant intellectual property from Antecip, an entity owned by its CEO and chairman, and may owe royalties of 1.5%–4.5% of licensed-product net sales, subject to reductions. The filing identifies potential conflicts of interest. No material pending legal proceedings were reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- Clinical readouts, enrollment progress and any changes to timing or scope for CREATE-1, STRIDE-1, COAST-1 and ADVANCE-1.
- Whether the stated cash runway remains achievable as trial and manufacturing spending develops, and the company’s access to additional capital.
- Achievement of the SVB loan milestones, resulting tranche availability, debt service and applicable covenants.
- Outcomes of the remaining patent review proceedings and the strength and scope of AXS-02 intellectual-property protection.
- FDA feedback and further development requirements for AXS-06, and any additional requirements related to AXS-05 formulation or safety.
- Potential related-party royalty obligations and governance management of the Antecip relationship.