XBiotech Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Dollar amounts below are in millions unless noted. XBiotech is a pre-commercial biopharmaceutical company developing True Human monoclonal antibodies. 2020 revenue came from Janssen manufacturing and clinical-trial service agreements, not from sales of approved products.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $10.5 | — | $38.7 | — |
| Gross profit | $1.1 | — | $6.4 | — |
| Gross margin | 10.6% | — | 16.6% | — |
| Operating loss | $(4.7) | $(6.1) | $(13.4) | $(17.9) |
| Net loss | $(2.5) | $(6.2) | $(9.4) | $(17.9) |
| Basic and diluted loss per share | $(0.09) | $(0.15) | $(0.30) | $(0.47) |
Q3 revenue comprised $6.0 million manufacturing revenue and $4.5 million clinical-trial service revenue. Nine-month amounts were $13.5 million and $25.2 million, respectively. The clinical-trial service agreement reimburses pass-through costs plus a 30% markup.
- Expenses: Nine-month R&D was $6.1 million, down from $13.8 million; management attributed much of the decline to costs moving into cost of goods sold under the Janssen agreements. G&A rose to $13.7 million from $4.2 million, including higher share-based compensation, a $2.7 million CEO bonus, and tender-offer-related professional and legal fees.
- Cash flow: Nine-month operating cash used was $64.8 million, investing cash used was $1.5 million, and financing cash used was $409.6 million. Operating cash use included a $51.1 million income-tax payment relating to 2019. Cash declined by $476.2 million from year-end 2019.
- Liquidity and debt: Cash and equivalents were $238.4 million at September 30, 2020, versus $714.6 million at December 31, 2019. Current assets were $251.7 million and current liabilities $6.2 million. Total liabilities were $7.3 million; the balance sheet reports no borrowings. The company expects a further $75 million payment from the Janssen transaction in 2021.
Material changes and unusual items
- Revenue began in 2020 under Janssen agreements; the comparable 2019 periods had no revenue or cost of goods sold. Gross profit was positive, but operating and net losses continued.
- In February 2020, XBiotech repurchased 14 million shares for approximately $420 million, about 32.7% of shares then outstanding. Shares outstanding were 29.2 million at September 30, versus 41.5 million at year-end 2019.
- Nine-month share-based compensation was $9.8 million, compared with $1.9 million in 2019. The company recorded income-tax benefits of $0.7 million for Q3 and $1.4 million for the nine months.
- Nine-month other income included $2.3 million of interest income and a $0.8 million foreign-exchange gain; Q3 included a $1.4 million foreign-exchange gain.
Outlook, commentary, and risks
- Management said cash, together with expected Janssen revenue, should fund operations for at least two years from the report date. It nevertheless expects significant operating losses for the foreseeable future and says profitability is not assured.
- The company said it was on schedule to begin clinical trials in 2021 for a newly developed anti-IL-1α candidate, while noting that COVID-19 could delay development timelines. It was also testing COVID-19 antibody leads and working on cell-line development.
- COVID-19 disrupted supplies, including syringes, masks, gloves, and other consumables; it delayed manufacturing and shipments for Janssen. Further supply constraints, reduced Janssen orders, trial delays, staffing constraints, or regulatory disruption could adversely affect revenue, research, and development. Management reported no material COVID-19 impact on results or financial position as of September 30, but cautioned that impacts could worsen.
- A licensing agreement with BioBridge Global allows it to use XBiotech’s ELISA methodology for detecting and quantifying SARS-CoV-2 antibodies.
- The company expects higher R&D spending as programs advance and higher compliance costs after its emerging-growth-company status ends. It reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Investor verification points
- Verify the timing and conditions of the remaining $75 million Janssen payment and the duration, termination rights, and expected economics of the Janssen agreements.
- Assess whether the reported clinical-service revenue and gross margins are sustainable, given pass-through costs, manufacturing delays, and COVID-related supply risks.
- Review cash-burn trends and management’s two-year liquidity estimate, including planned R&D and facility spending and the effect of the large share repurchase.
- Track the 2021 anti-IL-1α trial timetable and COVID-19 antibody program progress; the filing does not provide a clear quantified forecast for future revenue or losses.
- Confirm the drivers and potential recurrence of elevated share-based compensation, CEO compensation, foreign-exchange results, and tax benefits.