MacroGenics, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. MacroGenics is a clinical-stage biopharmaceutical company developing antibody-based therapeutics; it reported one operating segment and no product sales. Financial statements are unaudited. The October 2013 IPO and November collaboration milestone described below occurred after quarter-end.
Key financial results
| Metric | Three months ended September 30, 2013 | Nine months ended September 30, 2013 |
|---|---|---|
| Total revenue | $20.2 million | $43.1 million |
| Research and development expense | $11.1 million | $32.2 million |
| General and administrative expense | $2.0 million | $7.3 million |
| Operating income | $7.2 million | $3.6 million |
| Net income | $6.6 million | $2.9 million |
| Operating margin | 35.4% | 8.3% |
| Net margin | 32.6% | 6.8% |
| Net cash used in operating activities | Not presented quarterly | $13.0 million |
Margins are calculated as reported income divided by total revenue. Quarterly basic and diluted EPS were $0.14 and $0.01, respectively; nine-month EPS was reported as $0.00 for both. The two-class allocation of earnings to participating preferred shares affects common-share EPS.
Balance sheet at September 30: Cash and cash equivalents were $33.6 million; current assets $37.0 million; current liabilities $25.3 million; total assets $42.0 million; and total liabilities $46.0 million. Stockholders’ deficit was $4.0 million. No interest-bearing borrowings are shown in the balance sheet; liabilities include deferred revenue, lease exit and deferred rent obligations, and a preferred-stock warrant liability. Lease exit liability was $9.6 million, and future operating lease payments totaled $17.4 million.
Changes versus the prior comparable period
- Q3 revenue increased 26% to $20.2 million year over year, mainly reflecting a $10.0 million Servier milestone and revenue from the new Gilead collaboration; reduced Eli Lilly trial reimbursements partly offset the increase.
- Nine-month revenue declined 20% to $43.1 million, primarily because Eli Lilly’s teplizumab trial reimbursements wound down and government grants for certain infectious-disease research ended. Collaborative research revenue fell 17%; grant revenue fell 70%.
- R&D expense decreased 8% in Q3 and 13% for the nine-month period. Lower teplizumab spending offset increased DART-program spending; nine-month DART R&D expense more than doubled to $17.2 million.
- Net income was lower for the first nine months ($2.9 million versus $10.5 million), despite Q3 growth, reflecting lower revenue. Other expense included a $0.6 million fair-value loss on the preferred-stock warrant liability.
- Cash used in operations improved to $13.0 million from $24.3 million for the first nine months, but cash and cash equivalents declined by $14.2 million from year-end 2012. Capital spending increased to $2.0 million from $0.5 million.
Liquidity, outlook and material events
- On October 16, 2013, the company completed its IPO of 5.75 million shares at $16 per share. It reported $92.0 million gross proceeds and $83.8 million net proceeds after underwriting discounts, commissions and estimated offering expenses. All preferred shares converted to common stock; 25,020,288 common shares were outstanding as of October 31.
- Management expected IPO proceeds, existing cash and a significant portion of approximately $100 million in anticipated collaboration payments through 2015 to fund clinical development of margetuximab, MGA271, MGD006, MGD007 and MGD010 through 2015, assuming collaborations and programs progress as planned. Milestone receipts are uncertain and depend on development progress.
- Pipeline timing stated in the filing: margetuximab Phase 2a enrollment was ongoing, with a potential Phase 3 trial in advanced gastroesophageal cancer anticipated in the second half of 2014; MGA271 Phase 1 was underway, with completion expected by the end of 2014; MGD006 Phase 1 was expected in the first half of 2014 and MGD007 in the second half of 2014.
- In November 2013, Boehringer selected a DART candidate for preclinical development, triggering a $5.0 million milestone; a $4.0 million research maintenance payment was also expected in Q4 2013. Neither was included in September 30 results.
- The company had no product revenue and expected increased R&D spending. Management cautioned that development and regulatory outcomes are uncertain. Key risks include clinical failure or delay, manufacturing capacity and compliance, reliance on collaborators and milestone funding, competition, intellectual-property disputes, and the need for additional capital beyond the IPO.
- Unusual and contingent items include a potential $5.0 million Raven-related payment upon initiation of a qualifying Phase 2 trial by July 15, 2018, plus other sales- and revenue-linked consideration; no additional Raven contingent amounts were recorded during the nine months. Deferred collaboration revenue was $30.1 million at September 30.
Most important facts for investors to verify
- Reconcile the IPO’s gross, net and deferred offering-cost figures, and assess post-IPO cash, share count and dilution from converted preferred stock and options.
- Test the cash-runway assumption against actual collaboration receipts, development spending and potential delays; anticipated milestone and reimbursement payments are not assured.
- Track clinical-trial progress and results against management’s stated timing, particularly margetuximab, MGA271, MGD006 and MGD007.
- Assess revenue concentration and recognition: Servier represented 71.3% of Q3 revenue, and Q3 earnings included a $10.0 million milestone; deferred revenue and future milestone timing can make results uneven.
- Review lease and Raven contingent obligations, and the assumptions behind the Level 3 preferred-warrant valuation and its reported expense.