ElectroCore, Inc. 2018 Form 10-K Summary
Business context and reporting period
ElectroCore is a commercial-stage bioelectronic medicine company developing and commercializing gammaCore, a non-invasive vagus nerve stimulation therapy. The product was FDA-cleared for acute migraine treatment in adults, acute episodic cluster headache treatment, and cluster headache prevention. The company is also pursuing migraine prevention, adolescent migraine, post-traumatic headache, rheumatoid arthritis, Sjögren’s syndrome and other indications.
This Form 10-K covers the fiscal year ended December 31, 2018. The company completed its corporate conversion from Electrocore, LLC to electroCore, Inc. and completed its initial public offering in June 2018. gammaCore Sapphire, a rechargeable and reloadable product, was commercially launched in the United States during the second half of 2018 and became the principal commercial product in the fourth quarter.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $993.0 thousand | $811.5 thousand | +$181.5 thousand |
| Gross profit | $414.2 thousand | $292.9 thousand | +$121.3 thousand |
| Gross margin | 41.7% | 36.1% | +5.6 percentage points |
| Research and development expense | $12.5 million | $7.8 million | +$4.7 million |
| Selling, general and administrative expense | $42.5 million | $18.1 million | +$24.4 million |
| Operating loss | $54.6 million | $25.6 million | Loss increased $28.9 million |
| Net loss | $55.8 million | $36.0 million | Loss increased $19.7 million |
| Net loss attributable to electroCore, Inc. | $34.7 million | Not applicable before conversion | — |
| Basic and diluted loss per share | $1.19 loss | Not presented | — |
Fourth-quarter 2018 net sales were approximately $368 thousand, compared with $234 thousand in the fourth quarter of 2017. Fourth-quarter operating expenses were $15.9 million and net loss attributable to Electrocore LLC and electroCore, Inc. was approximately $15.3 million.
Net sales increased primarily because of the U.S. commercial launch and higher prescription volume. The United States generated $619.8 thousand of 2018 sales, compared with $243.2 thousand in 2017. Germany sales declined by $211.7 thousand following termination of a prior distribution arrangement.
Cash, cash equivalents and marketable securities totaled approximately $68.6 million at December 31, 2018, compared with $37.2 million at December 31, 2017. Cash and cash equivalents were $7.6 million, and marketable securities were $61.0 million. The company reported no outstanding debt at year-end.
- Net cash used in operating activities: $47.1 million, compared with $25.3 million in 2017.
- Net cash used in investing activities: $36.8 million, primarily reflecting purchases of marketable securities.
- Net cash provided by financing activities: $78.3 million, principally from the IPO.
- IPO gross proceeds were approximately $89.7 million, with net proceeds of approximately $77.5 million after discounts and offering costs.
- Working capital was approximately $65.6 million at year-end.
- The company stated that available cash resources were expected to fund operating and capital requirements for at least the next 12 months from the filing date, but additional capital may be required thereafter.
Material changes versus the prior comparable period
- Prescription volume increased to approximately 15,000 in 2018, including approximately 5,800 in the fourth quarter, from a materially smaller pre-launch base.
- The U.S. direct sales force expanded to 32 representatives after the IPO, targeting approximately 6,400 headache physicians.
- Coverage arrangements or agreements were estimated to provide reimbursement access to approximately 53 million U.S. lives as of January 2019.
- Operating expenses more than doubled, reflecting commercial infrastructure, sales personnel, clinical development, legal and compliance costs, promotional programs and stock-based compensation.
- Stock-based compensation increased substantially and totaled approximately $7.6 million in 2018.
- The company’s voucher and co-pay programs generated approximately $4.7 million of product sales value dispensed to patients that was not included in reported net revenue. Aggregate product value dispensed, including reported revenue, was approximately $5.8 million.
- The June 2018 corporate conversion eliminated the prior preferred-unit and LLC structure. Preferred units and common units converted into common stock, and the accumulated deficit was reclassified to additional paid-in capital.
- The warrant liability was reclassified to equity upon the IPO; a $1.9 million change in fair value of the warrant liability was recorded in 2018.
Guidance, outlook, commentary and risks
Management did not provide formal revenue or earnings guidance. The stated strategy is to expand payer coverage, increase physician and patient adoption, build the commercial organization, and fund clinical development for additional indications. Management targeted coverage of approximately 75 million U.S. lives by the beginning of the third quarter of 2019 and 100 million lives by year-end 2019, although these targets were not assured.
The company expects continuing substantial operating losses and negative operating cash flow for at least the next several years. Future financing may be obtained through equity offerings, debt or other arrangements; additional financing may be dilutive or unavailable on acceptable terms.
- Commercial success depends heavily on payer coverage and reimbursement. Reported covered lives do not necessarily equate to paid prescriptions or realized revenue.
- The company has a short U.S. commercialization history and faces competition from pharmaceutical companies, medical-device companies and other neuromodulation products.
- Clinical and regulatory risk remains significant. Some pivotal trials did not meet their primary endpoints in the total study populations, and additional label expansions may not receive clearance.
- The company relies on third-party manufacturers, component suppliers, one U.S. specialty pharmaceutical distributor and specialty pharmacy infrastructure.
- Voucher, co-pay assistance, rebates and medical-benefit reimbursement may reduce realized pricing and reported revenue.
- Regulatory, healthcare fraud and abuse, privacy, cybersecurity, product liability, intellectual property and supply-chain risks could materially affect results.
- Lease and purchase commitments totaled approximately $6.4 million and $6.8 million, respectively, at December 31, 2018.
- In January 2019, the company settled a former-advisor dispute for $325 thousand and issued warrants for 62,181 shares. In March 2019, Lifehealthcare Pty Ltd asserted claims related to a terminated Australian joint venture; management stated that any financial impact was not expected to be material, but the outcome was uncertain.
Most important facts for an investor to verify
- Whether prescription growth converts into paid, recurring revenue rather than voucher or co-pay-assisted utilization.
- Actual reimbursement coverage, utilization restrictions, rebate levels and net realized price across the reported 53 million covered lives.
- Quarterly cash burn and the timing of any additional financing relative to the company’s stated cash runway.
- Gross-margin performance following the transition to gammaCore Sapphire and the effect of promotional programs.
- Enrollment, timing and results of PREMIUM II and other clinical programs supporting migraine prevention and rheumatology indications.
- Whether the company can achieve sustainable commercial scale before cash resources are depleted.
- Resolution and potential financial impact of the Lifehealthcare claim and any other legal, regulatory or reimbursement contingencies.