Business context and reporting period
This is PharmAthene, Inc.’s Form 10-K for the fiscal year ended December 31, 2016, filed March 14, 2017—not an Altimmune 10-K or a quarterly filing. PharmAthene was a biodefense company developing anthrax countermeasures; substantially all operating revenue came from U.S. government contracts. The company entered into a proposed merger with Altimmune in January 2017, after year-end.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Contract revenue | $5.23 million | $10.64 million |
| Operating expenses | $16.49 million | $14.04 million |
| Operating loss | $11.26 million | $3.40 million |
| Other income, principally SIGA litigation proceeds | $216.29 million | $0.02 million |
| Net income (loss) | $193.85 million | $(3.44) million |
| Net income (loss) per diluted share | $2.95 | $(0.05) |
| R&D expense | $4.84 million | $5.13 million |
| G&A expense | $11.52 million | $6.22 million |
Cash and cash equivalents were $153.99 million at year-end, with $66.81 million in short-term investments; working capital was $17.43 million. Current liabilities included $197.08 million of dividends payable. The company reported total liabilities of $205.28 million, largely reflecting that dividend obligation; its GE loan had been repaid in 2015, and no year-end debt balance is reported. Operating cash flow was $201.51 million, driven principally by SIGA receipts; cash used in investing was $66.88 million, mainly purchases of short-term securities, and financing cash flow was $3.80 million.
Material changes versus prior period
- Revenue declined about 51% year over year, from $10.64 million to $5.23 million, as prior BARDA contract wind-down/audit revenue fell away. 2016 revenue included $4.4 million from NIAID’s SparVax-L contract and $0.8 million from a BARDA audit settlement.
- Net income turned sharply positive because PharmAthene recorded approximately $217.1 million of SIGA litigation proceeds as other income. This was a one-time recovery, not recurring operating profit; the company still reported an $11.26 million operating loss.
- G&A rose about 85%, mainly due to stock-based compensation, anthrax proposal/protest costs, and proposed-merger expenses, partly offset by lower SIGA legal costs. R&D declined about 6%.
- Cash increased substantially following SIGA payments. The $2.91-per-share special dividend, approximately $200 million in aggregate, was declared in November 2016, recorded as payable at year-end, and paid February 3, 2017.
Outlook, risks and unusual items
NIAID had exercised four contract options, providing approximately $8.8 million of additional funding and extending SparVax-L performance through December 31, 2017. The contract could reach approximately $28.1 million if all eight options are exercised and technical milestones are met; further options are discretionary. Management said year-end cash excluding amounts allocated to the dividend was expected to fund operations for at least 12 months from the report date. The filing cautions that foreseeable revenue depended on the NIAID contract and would not be sufficient to achieve profitability.
The proposed merger terms contemplated former PharmAthene holders owning about 41.8% and former Altimmune holders about 58.2% of the combined company on an as-converted, fully diluted basis. Completion remained subject to shareholder approvals and other conditions, including a minimum PharmAthene net-cash condition of $10.25 million, receipt of $3.5 million in committed Altimmune capital, limits on Altimmune liabilities, and listing approval. The filing described anticipated development milestones for combined-company programs, but these were expectations, not assured outcomes.
Principal risks include reliance on government funding and contract options; clinical, preclinical and FDA approval uncertainty, including reliance on the Animal Rule; third-party manufacturing and research dependencies; possible challenges to NOL availability or tax treatment; merger completion, integration, dilution and listing risks; and NYSE MKT continued-listing requirements. The company reported spending approximately $1 million on its 2016 DHHS procurement protest before withdrawing it after discussions on advancing SparVax-L. It also reported a $11.2 million tax provision related primarily to SIGA proceeds and NOL utilization, and a $6.9 million valuation allowance on remaining deferred tax assets. Management and the auditor reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Confirm this PharmAthene 2016 annual report is the intended filing; the supplied company label says Altimmune, and the period label says 2016 Q4.
- Review the post-year-end dividend payment and the resulting cash available for operations, including the merger’s minimum-cash condition.
- Track NIAID option exercises, technical milestones, contract duration and any successor government funding.
- Separate the one-time SIGA litigation gain from recurring operating performance and assess the company’s continuing operating losses.
- Check merger approvals, closing conditions, final share issuance/reverse-split terms, and the combined company’s listing and financing position.
- Assess the validity and Section 382 limitations of NOLs, potential tax exposure, and any effect on cash after the dividend.