ADMA Biologics, Inc. — First Quarter 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is the three months ended March 31, 2016. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business Context
ADMA is a late-stage biopharmaceutical company developing plasma-based biologics for immune deficiencies and infectious diseases. Its operating revenue primarily comes from plasma collected at two FDA-licensed Georgia facilities. Its lead product candidate, RI-002, is intended to treat primary immune deficiency disease (PIDD).
The FDA issued a Complete Response Letter for RI-002 in July 2016, citing manufacturing, inspection, and vendor deficiencies rather than concerns with the submitted clinical safety or efficacy data. ADMA was preparing a BLA resubmission and awaiting additional FDA feedback.
Financial Performance and Position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $2.629 million | $2.124 million | Up 24% |
| Product revenue | $2.593 million | $2.088 million | Up 24% |
| Gross profit | $1.013 million | $0.857 million | Up 18% |
| Gross margin | 38.5% | 40.4% | Down approximately 190 bps |
| Loss from operations | $(5.937) million | $(4.159) million | Loss increased 43% |
| Net loss | $(6.537) million | $(4.612) million | Loss increased 42% |
| Net loss per share | $(0.51) | $(0.43) | Worsened |
| Cash used in operations | $(5.398) million | $(5.168) million | Use increased 4% |
Operating and net margins remained deeply negative because operating expenses substantially exceeded revenue. Total operating expenses were $8.566 million, including $1.193 million of research and development, $1.479 million of plasma-center expenses, and $4.277 million of general and administrative expenses.
At March 31, 2017, cash and cash equivalents were $8.543 million, short-term investments were $0.245 million, and working capital was approximately $2.7 million. Inventories were $5.308 million, while total assets were $17.595 million and total liabilities were $28.353 million. Stockholders’ deficiency was $(10.758) million.
Debt included $20.0 million of original Oxford principal, reduced by $1.111 million of principal repayments during the quarter. The carrying value of the Oxford note was $17.512 million after debt discounts. Principal repayments began February 1, 2017, and the facility matures no later than January 1, 2020.
Cash decreased by $1.372 million during the quarter to $8.543 million. Investing activities provided $5.142 million, primarily from sales of short-term investments, while financing activities used $1.115 million, primarily for Oxford debt repayment.
Material Changes Versus the Prior Comparable Period
- Revenue increased $0.505 million, primarily because of higher plasma sales under the SK Plasma supply agreement.
- Gross profit increased, but gross margin declined because cost of product revenue grew faster than product revenue.
- R&D expense declined $0.835 million, or 41%, primarily because RI-002 validation, testing, and production costs decreased after the FDA response letter.
- Plasma-center expenses increased $0.199 million, or 16%, due to additional staffing and increased operating hours at the Marietta facility.
- General and administrative expense increased $2.570 million, or 151%, largely because of proposed acquisition fees, legal, accounting, financial advisory, fairness-opinion, and due-diligence costs.
- Interest expense increased to $0.619 million from $0.467 million, primarily reflecting the additional $4.0 million Oxford borrowing and related debt-cost amortization.
- Accounts payable increased by approximately $1.340 million, principally for acquisition-related professional fees.
- ADMA began making scheduled principal payments on its Oxford debt.
Outlook, Transactions, Risks, and Unusual Items
On January 21, 2017, ADMA entered into an agreement to acquire certain Biotest Pharmaceuticals Corporation assets, including an FDA-licensed Boca Raton manufacturing facility, rights to Nabi-HB, BIVIGAM, and investigational CIVACIR, and at least $5.0 million of in-process inventory. Closing was anticipated for June 2017 and remained subject to conditions including stockholder approval and other closing requirements.
At closing, Biotest was expected to provide $12.5 million of funding, a $15.0 million subordinated loan, and a commitment to participate in a future equity financing of up to $12.5 million. The transaction would also result in Biotest receiving a substantial equity interest, targeted at 50% less one share of ADMA’s post-closing capital stock. The filing provided no assurance that the acquisition would close.
Management estimated that existing cash, investments, projected revenue, and accounts receivable would fund operations into the second half of 2017. If the proposed acquisition closed, the expected Biotest funding was projected to extend liquidity into the first quarter of 2018. ADMA stated that additional capital would be needed thereafter and that no financing arrangements, other than the proposed Biotest funding, were currently in place.
The financial statements disclose substantial doubt about ADMA’s ability to continue as a going concern because of recurring losses, negative operating cash flow, limited liquidity, debt obligations, and the need for additional financing. The company had an accumulated deficit of $113.5 million as of March 31, 2017.
Key risks include failure or delay in closing the Biotest transaction, inability to remediate manufacturing deficiencies and resubmit the RI-002 BLA, FDA rejection or further requests for studies or information, dependence on third-party manufacturers and plasma suppliers, customer concentration, debt acceleration, dilution from future financing, and potential inability to continue operations.
For Q1 2017, BPC represented approximately 81% of total revenue and SK represented approximately 17%; together they represented 98% of total revenue. The company also entered into a new Marietta facility lease with expected monthly costs of approximately $20,000 to $27,000 during the initial term, subject to rent-free periods described in the filing.
Investor Verification Checklist
- Verify whether the proposed Biotest asset acquisition closed and whether the stated $12.5 million funding, $15.0 million loan, and future equity commitment were received.
- Verify the status of RI-002 manufacturing remediation, FDA feedback, and the timing and outcome of any BLA resubmission.
- Reconcile cash burn, debt amortization, and liquidity against the company’s stated funding runway into the second half of 2017.
- Assess the potential dilution and governance effects of Biotest’s proposed equity interest and any subsequent capital raises.
- Monitor customer concentration, particularly dependence on BPC and SK, and the effect of any change in their purchasing or financial condition.
- Review Oxford debt covenants, repayment requirements, security interests, and events that could trigger acceleration.
- Evaluate whether the proposed manufacturing asset acquisition resolves the FDA warning-letter and quality-system issues without creating material assumed liabilities.