Oramed Pharmaceuticals Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended August 31, 2017 (not a standalone fourth-quarter report). Figures are U.S. dollars; financial amounts below are in millions unless noted.
Business context
Oramed is a clinical-stage pharmaceutical company developing oral delivery technology for proteins and peptides. Its lead candidate is ORMD-0801, an oral insulin capsule; its other principal candidate is ORMD-0901, an oral exenatide (GLP-1) capsule. The company had no product sales; reported revenue arose from its China-region license agreement with HTIT.
Financial performance and liquidity
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Revenue | $2.456 | $0.641 | Up 283%, primarily from HTIT license milestones; no revenue in FY2015. |
| Cost of revenue | $0.187 | $0.490 | Lower year over year. |
| Research and development, net | $10.281 | $7.709 | Up 33%, including process development, production and toxicology work. |
| General and administrative | $2.759 | $2.452 | Up 12.5%. |
| Operating loss | $10.771 | $10.010 | Widened despite higher license revenue. |
| Net loss | $10.480 | $10.964 | Narrowed 4.4%; loss per share was $0.79 versus $0.87. |
| Operating cash flow | $(5.831) | $4.655 | FY2016 included substantial cash from deferred license revenue. |
| Cash and cash equivalents | $3.969 | $3.907 | At fiscal year-end. |
| Working capital | $15.132 | $27.609 | Declined mainly due to transfers into long-term deposits and operating cash use. |
At August 31, 2017, current assets were $20.297 million and current liabilities $5.165 million. The company also held $29.525 million in short- and long-term deposits and investments, and $5.011 million in marketable securities, as described in the liquidity discussion. Total assets were $38.712 million; stockholders’ equity was $19.238 million. Liabilities were largely deferred revenue and other operating obligations; the filing does not identify interest-bearing borrowings as a material financing source. A meaningful operating margin is not representative of this development-stage, loss-making business.
Management reported no off-balance-sheet arrangements and said current resources and commitments were expected to support planned development spending for at least the next 12 months and beyond, while cautioning that additional funding could be needed. The company has a history of losses and had accumulated losses of $56.496 million.
Material changes and notable items
- Revenue increased with HTIT milestone-related recognition, while R&D spending rose as development and manufacturing-process work advanced. Net loss decreased modestly; operating loss increased.
- Operating cash flow shifted from positive $4.655 million in FY2016 to use of $5.831 million in FY2017. Financing activities provided $1.586 million in FY2017, mainly from warrant and option exercises; there was no material new equity issuance for cash reported in the fiscal-year cash flow statement.
- The HTIT agreement grants exclusive ORMD-0801 commercialization rights in mainland China, Macau and Hong Kong. It provides for up to approximately $37.5 million in aggregate payments, subject to agreements, milestones and conditions, plus royalties generally at 10% of net sales, potentially reducible under specified circumstances. $17.5 million of milestone payments had been received by October 2016; future payments and royalties remain conditional.
- License consideration is recognized over time through the expected product submission date (June 2023), leaving $16.286 million of deferred revenue at year-end. FY2017 revenue therefore should not be read as product-sales revenue or as equivalent to cash collected during FY2017.
- The company recognized $0.400 million of income tax expense in FY2017, principally withholding tax on HTIT milestone payments; it maintained a full valuation allowance against deferred tax assets.
Outlook, risks and contingencies
- In an August 2017 FDA discussion, the agency advised that ORMD-0801’s U.S. submission pathway would be a Biologics License Application. This was regulatory-pathway guidance, not approval. The filing describes potential 12-year exclusivity if approved.
- Management planned a first-quarter calendar 2018, three-month dose-ranging study in approximately 240 type 2 diabetes patients, measuring safety and HbA1c, and a clamp study in six type 1 diabetes patients. Further Phase III studies and a possible later application depend on successful results and regulatory progress; the filing’s projected timelines are not guarantees.
- For ORMD-0901, management expected to file an IND and proceed to a pharmacokinetics study and then a U.S. Phase II trial, subject to toxicology results and regulatory steps. A November 2017 NASH study approval was disclosed as a post-year-end development.
- Key risks include clinical failure or delay, regulatory uncertainty, need for additional capital and potential dilution, dependence on partners and a limited supplier base, competition, patent protection and infringement claims, foreign-exchange exposure, and political and security risks associated with Israeli operations. The company did not hedge currency exposure.
- Contractual obligations totaled $7.084 million at year-end, including $2.166 million of clinical research obligations and $4.153 million of purchase and technology-transfer obligations. The filing reports no material pending legal proceeding.
Most important facts for investors to verify
- Whether planned ORMD-0801 studies began on schedule, enrolled as intended, and produced clinically and statistically meaningful results, particularly for HbA1c and safety.
- Whether toxicology, manufacturing scale-up, supplier qualification and regulatory requirements support the proposed trial and any later BLA submission.
- HTIT milestone conditions, amounts still payable, applicable royalty reductions, and the timing and collectability of future license revenue.
- Cash burn and liquid resources, including the liquidity and realizable value of D.N.A. shares, future financing needs, and the effect of any equity issuance.
- How deferred license revenue is recognized, and whether cash receipts, recognized revenue and related royalty obligations are being distinguished appropriately.