Business Context and Reporting Period
Protagonist Therapeutics, Inc. is a clinical-stage biopharmaceutical company developing peptide-based therapies. The unaudited Form 10-Q covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
- Lead programs included PTG-100 in a global Phase 2B ulcerative colitis trial, PTG-300 in a Phase 1 study, and PTG-200, which was expected to enter Phase 1 in the fourth quarter of 2017.
- The company had no approved products and no product sales revenue.
- As of September 30, 2017, the company had 16,944,103 common shares outstanding and 49 full-time employees.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| License and collaboration revenue | $8.8 million | $0 | $8.8 million | $0 |
| Research and development expense | $11.2 million | $5.6 million | $34.5 million | $16.9 million |
| General and administrative expense | $2.6 million | $1.6 million | $8.7 million | $4.4 million |
| Loss from operations | $(5.0) million | $(7.1) million | $(34.4) million | $(21.3) million |
| Net loss | $(4.8) million | $(7.1) million | $(33.9) million | $(25.9) million |
| Net loss per share | $(0.29) | $(0.87) | $(2.01) | $(8.62) |
Q3 2017 operating margin was approximately negative 57% and net margin was approximately negative 55%. For the nine-month period, operating and net margins were negative because revenue consisted only of collaboration-related amounts and did not represent product sales.
- Cash and cash equivalents were $50.4 million at September 30, 2017. Available-for-sale securities totaled $54.5 million, resulting in cash, cash equivalents and available-for-sale securities of approximately $104.9 million.
- Cash provided by operating activities was $18.0 million for the first nine months of 2017, compared with $20.3 million used in 2016. The 2017 inflow was primarily driven by the $41.7 million increase in deferred revenue from the Janssen agreement.
- Cash provided by investing activities was $11.1 million, mainly reflecting $39.8 million of security maturities partially offset by $28.2 million of security purchases.
- Cash provided by financing activities was $0.5 million, compared with $107.2 million in 2016 from the IPO and preferred-stock financing.
- The company reported no outstanding debt or credit facility.
- Accumulated deficit was $98.5 million, and total stockholders’ equity was $57.8 million at September 30, 2017.
- Deferred revenue related to Janssen was $41.7 million, with a related-party collaboration receivable of $0.5 million.
Material Changes Versus the Prior Comparable Period
- Janssen collaboration revenue of $8.8 million was recognized in Q3 and the first nine months of 2017, versus no comparable revenue in 2016.
- R&D expense increased 101% in Q3 and 104% for the nine-month period, primarily due to higher PTG-100 clinical costs, PTG-200 development activity, PTG-300 Phase 1 costs, and increased headcount.
- G&A expense increased 64% in Q3 and 98% for the nine-month period due to personnel, professional services, consulting, insurance and public-company costs.
- Net loss improved in Q3 because collaboration revenue exceeded the increase in operating expenses, but the nine-month net loss increased 31% because expense growth exceeded recognized revenue.
- Non-cash stock-based compensation increased to $3.1 million for the first nine months of 2017 from $0.6 million in the prior-year period.
- The prior-year period included $4.7 million of charges related to the fair value of preferred-stock tranche and warrant liabilities; no such charges occurred in 2017.
- The company adopted ASC 606 effective July 1, 2017 using the full retrospective method. Management stated that adoption had no impact on previously reported financial position, results of operations or liquidity.
Guidance, Outlook, Risks and Unusual Items
- The Janssen agreement became effective July 13, 2017 and provided a $50.0 million non-refundable upfront payment. The company recognized $8.4 million of that transaction price based on proportional performance and $0.4 million for other services.
- The agreement provides potential future payments of $25.0 million upon filing a Phase 2 IND, $125.0 million and $200.0 million for specified opt-in elections, up to $590.0 million of additional development, regulatory and sales milestones, and tiered royalties ranging from 10% to the mid-teens. None of these milestone or royalty amounts had been recognized as of September 30, 2017.
- The $25.0 million Phase 2 IND payment was fully constrained because filing was not considered probable at the reporting date. Janssen may terminate the agreement for convenience; termination could return rights to the company and materially increase its funding obligations.
- Management expected PTG-100 Phase 2B interim futility analysis in early 2018 and trial completion in the second half of 2018. Management also expected final PTG-300 top-line data in the fourth quarter of 2017, a potential PTG-300 IND in 2018, and selection of a third oral peptide candidate for preclinical development in 2018.
- Management stated that existing cash, cash equivalents and securities were expected to fund operations and capital requirements for at least the next 12 months, but substantial additional capital would be required to advance programs, including any pivotal trials.
- On October 16, 2017, after the reporting date, the company sold 3.53 million shares for gross proceeds of $60.0 million and approximately $56.2 million of net proceeds. Underwriters also received an option for up to 529,500 additional shares.
- Medical Diagnostic Laboratories filed a patent-infringement lawsuit on September 26, 2017 concerning PTG-200-related polypeptides. The company could not estimate the potential loss because the proceedings were at an early stage.
- The company’s disclosure controls were not effective at the reasonable-assurance level because two previously identified material weaknesses in internal control over financial reporting remained unremediated. Remediation efforts included a new accounting system, additional personnel and enhanced journal-entry reviews.
- Lease commitments for the Newark facility totaled $13.2 million, including a $0.45 million letter of credit collateralized by restricted cash.
Important Facts for Investors to Verify
- Progress, enrollment, interim analysis and results of the PTG-100 Phase 2B trial and the PTG-300 Phase 1 trial.
- Timing and success of PTG-200 Phase 1 development, Phase 2 IND filing and Janssen’s future opt-in decisions.
- Whether deferred Janssen revenue is recognized as planned and whether future milestone or royalty payments become probable.
- Cash burn excluding the one-time Janssen upfront payment, and the timing and terms of future equity or debt financing.
- Outcome and potential financial or development impact of the MDL patent litigation.
- Remediation of the material weaknesses and whether future filings report effective disclosure controls and internal controls.
- Clinical, regulatory, manufacturing, intellectual-property and commercialization risks affecting PTG-100, PTG-200 and PTG-300.