Aquestive Therapeutics, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 8, 2019. Aquestive is a specialty pharmaceutical company developing and commercializing oral-film products, with commercial manufacturing, licensing and proprietary-product activities. Sympazan, its first directly commercialized product, launched in December 2018.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $12.643 million | $23.411 million | Down 46% |
| Operating loss | $13.074 million | Operating income of $5.305 million | Unfavorable change of $18.379 million |
| Net loss/(income) | $14.726 million | Net income of $4.099 million | Unfavorable change of $18.825 million |
| Basic and diluted loss/(income) per share | $(0.59) | $0.27 | Unfavorable change |
| Cash flow from operations | $(17.680) million | $0.785 million | Decrease of $18.465 million |
| Cash and cash equivalents | $39.934 million | $16.488 million | Prior-year comparison |
Total operating costs were $25.717 million, compared with $18.106 million in Q1 2018. Selling, general and administrative expense increased 137% to $17.908 million, primarily from commercialization and marketing investments, legal costs, public-company infrastructure and share-based compensation. Research and development expense declined 12% to $4.303 million, while manufacturing and supply expense declined 38% to $3.506 million.
Operating margin was approximately (103.4%) and net margin was approximately (116.5%), compared with positive margins in Q1 2018. The filing does not present a conventional gross margin because costs are reported by operating-expense category rather than as a separate cost-of-revenue line.
At March 31, 2019, total assets were $67.979 million, total liabilities were $74.035 million and shareholders’ equity was a deficit of $6.056 million. Working capital was $26.320 million. Loans payable had a carrying value of approximately $47.592 million, including $6.850 million classified as current and $40.742 million classified as non-current. The company maintained compliance with its debt covenants, including a $4.000 million minimum cash requirement.
Revenue composition and material changes
| Revenue category | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Manufacture and supply | $6.669 million | $11.560 million | Down 42% |
| License and royalty | $4.622 million | $9.500 million | Down 51% |
| Co-development and research fees | $0.770 million | $2.351 million | Down 67% |
| Proprietary product sales | $0.582 million | — | New in 2019 |
- Manufacturing revenue declined primarily because of the timing of Indivior’s Suboxone purchase orders following the entry of at-risk generic competitors into the U.S. market.
- License and royalty revenue declined because of uneven payment timing and the suspension of certain Indivior license fees pending related patent litigation. Royalty revenue from Suboxone and Zuplenz was described as broadly stable.
- Co-development and research revenue declined because milestone and performance-obligation timing varies significantly between periods.
- Sympazan generated $0.582 million of net product sales following its December 2018 launch.
- Indivior represented approximately 88% of Q1 2019 revenue and approximately 80% of gross accounts receivable, creating significant customer concentration.
- The company adopted ASC 606 on January 1, 2019 using the modified retrospective method, recording a $2.832 million cumulative reduction to opening accumulated equity, primarily from deferral of previously recognized licensing revenue.
Cash flow, liquidity and outlook
Cash decreased by $20.665 million during the quarter, comprising $17.680 million of operating cash use, $0.376 million of capital expenditures and $2.609 million of financing cash use. The financing outflow primarily reflected $2.609 million of taxes on share-based compensation. Management stated that cash on hand, expected licensed-product revenue and Sympazan revenue should fund operations for at least the next twelve months, but noted that this expectation depends on assumptions that could change.
The Perceptive debt facility bears interest at one-month LIBOR plus 9.75%, subject to an 11.75% floor, and matures December 16, 2020. Principal payments began in May 2019. The company expected to refinance the secured debt facility during 2019, but had no committed additional capital source at the filing date. Potential future funding sources include debt or equity financing and monetization of royalty streams.
Management expects continued net losses for at least the next two years as it funds Sympazan commercialization, Libervant and Exservan development and commercialization activities, and earlier-stage candidates. Exservan’s NDA was submitted in Q1 2019 with a stated FDA PDUFA goal date of November 30, 2019. Libervant entered a small comparative study and was expected to begin a rolling NDA submission in Q2 2019.
Risks, contingencies and unusual items
- Suboxone-related patent litigation remains active. Dr. Reddy’s, Alvogen and Mylan launched generic products; the Dr. Reddy’s and Alvogen launches were described as “at risk.” Appeals and additional patent cases remained unresolved.
- Indivior’s future payments under a supplemental agreement were suspended pending patent litigation. The company had received $40.750 million through February 20, 2019 and could receive additional amounts if specified litigation outcomes occur, but future payments are contingent.
- A state and District of Columbia antitrust action relating to Suboxone remains in expert discovery. Aquestive stated that it could not estimate the potential outcome or loss.
- The Department of Justice indicted Indivior over alleged deceptive marketing and distribution practices and sought at least $3 billion. Aquestive warned that adverse effects on Indivior could materially reduce purchase orders, licensing revenue or the broader relationship.
- The company relies heavily on a limited number of products, customers and licensees, particularly Indivior, and operates primarily from a single manufacturing site.
- Share-based compensation was $1.520 million in Q1 2019. No warrant fair-value gain was recorded because the Perceptive warrants were exercised in connection with the 2018 IPO.
Investor verification priorities
- Track Suboxone production volumes, Indivior purchase orders, generic competition and the outcome of related patent appeals and trials.
- Verify the timing and collectability of suspended Indivior license payments and any contingent supplemental-agreement payments.
- Assess Sympazan prescription growth, net sales after rebates and other commercial deductions, and the effect of commercialization spending on cash burn.
- Monitor Exservan and Libervant regulatory milestones, including the Exservan PDUFA date and Libervant’s planned rolling NDA.
- Confirm refinancing progress before scheduled debt amortization and evaluate covenant compliance and minimum liquidity.
- Follow the antitrust litigation and Indivior’s criminal proceeding for potential financial, operational and relationship impacts.